<pre>
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-87062
CONECTISYS CORPORATION
PROSPECTUS SUPPLEMENT DATED JANUARY 22, 2003
TO PROSPECTUS DATED JUNE 10, 2002
The prospectus of ConectiSys Corporation dated June 10, 2002 is
supplemented to include information from the annual report on Form 10-KSB
for the fiscal year ended September 30, 2002 filed with the Securities and
Exchange Commission by ConectiSys Corporation on January 21, 2003 and to
include other updated information. Our consolidated financial statements
and related notes for the fiscal year ended September 30, 2002 are included
commencing on page F-1 of this supplement.
THE PROSPECTUS IS UPDATED TO PROVIDE FOR THE FOLLOWING:
- -------------------------------------------------------
All references to Pegasus Capital Partners, LLC are changed to AJW
Qualified Partners (f/k/a Pegasus Capital Partners, LLC) and all references
to AJW/New Millennium Offshore, Ltd. are changed to AJW Offshore, Ltd
(f/k/a AJW/New Millennium Offshore, Ltd.). Pegasus Capital Partners, LLC
has changed its name to AJW Qualified Partners LLC and AJW/New Millennium
Offshore, Ltd. has changed its name to AJW Offshore, Ltd.
THE PROSPECTUS SUMMARY SECTION IS UPDATED AS FOLLOWS:
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PROSPECTUS SUMMARY
This summary highlights some information from this prospectus.
Because it is a summary, it necessarily does not contain all of the
information necessary to your investment decision. To understand this
offering fully, you should read carefully the entire prospectus.
ConectiSys Corporation
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware
and software that will allow for residential and commercial applications.
Our proprietary system is called H-Net(TM), which is a trademark of
ConectiSys.
We are currently in a cost-reduction phase of the development of
our H-Net(TM) system and have completed the development for commercial
production of our H-Net(TM) 4.0 wireless meter reading product. We have not
yet sold any H-Net(TM) systems and we do not expect any significant sales of
our H-Net(TM) systems until mid 2003. Accordingly, we have not earned any
significant revenues from the sale of H-Net(TM) systems. We have no history of
revenues and have incurred significant losses since the beginning of the
development of our H-Net(TM) system. We have a significant accumulated deficit
and negative working capital. As a result of our financial condition, our
independent auditors have issued an opinion questioning our ability to
continue as a going concern.
Our H-Net(TM) system has been developed as an AMR solution
predominantly for application by utility companies and energy service
providers to assist in the comprehensive, low-cost remote reading of
electric energy meters in residential structures and the transmission of
that data on a frequent basis to a centralized location where the data can
be archived and further supplied to utility companies and energy service
providers for billing purposes, energy usage tracking, energy consumption
management and other uses.
Our H-Net(TM) system is comprised of the following three principal
components: H-Net(TM)-equipped meters, base stations and a network operating
center. H- Net(TM)-equipped meters are designed to communicate with one
another, relaying energy usage data back and forth, and ultimately
communicate with a base station where energy usage data is then transmitted
to a network operating center. Each base station is designed to service up
<page>1
to 20,000 H-Net(TM)- equipped meters and to transmit energy usage data to the
network operating center in fifteen minute intervals, 24 hours per day. The
network operating center is designed to collect and archive energy usage
data and then distribute the data over the Internet to customers such as
utility companies and energy service providers.
We believe that our AMR solution in the form of our H-Net(TM) system
is a cost-effective and useful AMR solution for meter reading applications
and that its adoption will allow for a wealth of new information regarding
energy usage. We plan to provide a variety of additional services to our
customers including remote meter reading, complete billing solutions and
remote access and control of energy meters.
The Offering
Common stock offered by selling security holders 37,477,427 (1)
Common stock outstanding prior to this offering 97,110,266 (2)
Common stock outstanding following this offering
if all shares are sold 134,587,693 (1)(2)
Use of Proceeds All proceeds of this
offering will be received
by selling security
holders for their own
accounts.
Risk Factors You should read the
"Risk Factors" section
beginning on page 5, as
well as other cautionary
statements throughout
this prospectus, before
investing in shares of
our common stock.
_____________
(1) As of January 6, 2003, the principal portion of the secured
convertible debentures and the related warrants whose underlying
shares of common stock are covered by this prospectus were
convertible into approximately 169,142,000 shares of common stock.
We have agreed to register for resale by the selling security
holders 200% of the shares of common stock underlying all
convertible debentures and related warrants that the selling
security holders have purchased and that they are obligated to
purchase. Accordingly, the common stock offering by selling
security holders assumes exercise of all of the warrants whose
underlying shares of common stock are covered by this prospectus in
exchange for 3,750,000 shares of common stock and conversion of the
principal amount of all of the debentures plus accrued interest
into 14,988,713 shares of common stock, and the immediate resale of
all of those shares of common stock.
(2) As of January 6, 2003, a total of 97,110,266 shares of common stock
were outstanding, excluding:
o 5,000,000 shares of common stock reserved for issuance under our
stock option plans, of which options to purchase 5,000,000 shares
were outstanding;
o shares of common stock issuable upon exercise of warrants or
conversion of debentures whose underlying shares of common stock
are covered by this prospectus;
o approximately 25,800,000 shares of common stock issuable or to
become issuable upon exercise or conversion of outstanding
warrants, non- plan options and other convertible securities, other
than the warrants and other convertible securities whose underlying
shares of common stock are covered by this prospectus; and
o any additional shares of common stock we may issue from time to
time after January 6, 2003.
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THE FOLLOWING RISK FACTORS ARE UPDATED AS FOLLOWS:
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RISK FACTORS
An investment in our common stock involves a high degree of risk.
In addition to the other information in this prospectus, you should
carefully consider the following risk factors before deciding to invest in
shares of our common stock. If any of the following risks actually occurs,
it is likely that our business, financial condition and operating results
would be harmed. As a result, the trading price of our common stock could
decline, and you could lose part or all of your investment.
Risks Related to Our Business
We have no history of revenues, have incurred
significant losses, expect continued losses and
may never achieve profitably. If we continue to
incur losses, we may have to curtail our
operations, which may prevent us from successfully
deploying our H- Net(TM) wireless meter reading
system.
We have no history of revenues, have not been profitable and expect
continued losses. Historically, we have relied upon cash from financing
activities to fund all of the cash requirements of our activities and have
incurred significant losses and experienced negative cash flow. As of
September 30, 2002, we had an accumulated deficit of approximately
$22,918,000. For our fiscal year ended September 30, 2002, we incurred a
net loss of approximately $2,347,000 and for our fiscal year ended
September 30, 2001, we incurred a net loss of approximately $2,154,000. We
cannot predict when we will become profitable or if we ever will become
profitable, and we may continue to incur losses for an indeterminate period
of time and may never achieve or sustain profitability. An extended period
of losses and negative cash flow may prevent us from successfully deploying
our H-Net(TM) wireless meter reading system, or our H-Net(TM) system, and
operating or expanding our business. As a result of our financial
condition, our independent auditors have issued an opinion questioning our
ability to continue as a going concern.
Our significant losses have resulted principally from costs
incurred in connection with the development of our H-Net(TM) system and from
costs associated with our administrative activities. We expect our
operating expenses to dramatically increase as a result of our planned
deployment of our H-Net(TM) system. Since we have not yet completed the
development of our H-Net(TM) system, have no operating history and no sources
of revenues, we cannot assure you that our business will ever become
profitable or that we will ever generate sufficient revenues to meet our
expenses and support our planned activities. Even if we are able to achieve
profitability, we may be unable to sustain or increase our profitability on
a quarterly or annual basis.
Our independent auditors have issued a report
questioning our ability to continue as a going
concern. This report may impair our ability to
raise additional financing and adversely affect
the price of our common stock.
The report of our independent auditors contained in our financial
statements for the years ended September 30, 2002 and 2001 includes a
paragraph that explains that we have incurred substantial losses and have a
working capital deficit. This report raises substantial doubt about our
ability to continue as a going concern. Reports of independent auditors
questioning a company's ability to continue as a going concern are
generally viewed unfavorably by analysts and investors. This report may
make it difficult for us to raise additional debt or equity financing
necessary to continue the development and deployment of our H-Net(TM) system.
We urge potential investors to review this report before making a decision
to invest in ConectiSys.
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Without substantial additional financing, we may
be unable to achieve the objectives of our current
business strategy, which could force us to delay,
curtail or eliminate our product and service
development programs.
We require additional financing to:
o produce cost-reduced hardware for our H-Net(TM) system capable of
large-scale manufacturing; and
o obtain and implement contracts and joint venture agreements with
meter manufacturers.
If we are unable to obtain this financing, we could be forced to
delay, curtail or eliminate certain product and service development
programs or entirely abandon our planned deployment of our H-Net(TM) system.
In addition, our inability to obtain financing could have such a material
adverse effect on our business, prospects, results of operations or
financial condition, that we may be forced to restructure, file for
bankruptcy, sell assets or cease operations entirely, any of which could
jeopardize an investment in our common stock.
We have a limited operating history of seven years
and very limited operating experience; therefore,
regardless of the viability or market acceptance
of our H-Net(TM) system, we may be unable to achieve
profitability or realize our other business goals.
Our H-Net(TM) system is the result of a new venture. We have been
engaged in research and development of automatic meter reading technologies
since 1995, and we have only recently completed limited pilot programs for
our first and only product, our H-Net(TM) automatic meter reading system. We
have generated no operating revenues from our H-Net(TM) system and have not
commenced any of the widespread marketing and other functions that we
anticipate will be required for successful deployment of our H-Net(TM) system.
Deployment of our H-Net(TM) system will involve large-scale cost-reduction
manufacturing runs for the production of the components employed in our H-
Net(TM) system. Our success will depend in large part on our ability to deal
with the problems, expenses and delays frequently associated with bringing
a new product to market. Because we have little experience in the
deployment and operational aspects of automatic meter reading technologies,
we may be unable to successfully deploy and operate our H-Net(TM) system even
if our H-Net(TM) system proves to be a viable automatic meter reading solution
and achieves market acceptance. Consequently, we may be unable to achieve
profitability or realize our other business goals.
Our failure to manage growth effectively could
impair our business.
We have recently emerged from the development stage and although we
do not currently have revenue-generating operations, our strategy envisions
a period of rapid growth that may impose a significant burden on our
administrative and operational resources. Our ability to effectively manage
growth will require us to substantially expand the capabilities of our
administrative and operational resources and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other personnel.
There can be no assurance that we will be able to do so. If we are unable
to successfully manage our growth, our business, prospects, results of
operations and financial condition could be materially and adversely
affected.
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Risks Related To This Offering
Shares of our common stock eligible or to become
eligible for public sale could adversely affect
our stock price and make it difficult for us to
raise additional capital through sales of equity
securities.
As of January 6, 2003, we had outstanding 97,110,266 shares of
common stock, of which all but approximately 60,000,000 shares were
unrestricted under the Securities Act of 1933. As of January 6, 2003, we
also had outstanding options, warrants, promissory notes, convertible
debentures and preferred stock that were exercisable for or convertible
into approximately 211,000,000 shares of common stock, approximately
180,000,000 of which are covered by registration rights. Sales of a
substantial number of shares of our common stock in the public market, or
the perception that sales could occur, could adversely affect the market
price of our common stock. Any adverse effect on the market price of our
common stock could make it difficult for us to raise additional capital
through sales of equity securities at a time and at a price that we deem
appropriate.
Conversion or exercise of our outstanding
derivative securities could substantially dilute
your investment because the conversion and
exercise prices of those securities and/or the
number of shares of common stock issuable upon
conversion or exercise of those securities are
subject to adjustment.
We have issued various notes, debentures and warrants that are
convertible or exercisable at prices that are subject to adjustment due to
a variety of factors, including fluctuations in the market price of our
common stock and the issuance of securities at an exercise or conversion
price less than the then-current exercise or conversion price of those
notes, debentures or warrants. As of January 6, 2003, the closing price of
a share of our common stock on the OTC Bulletin Board(R) was $.011. On that
date, our notes, debentures and warrants outstanding with adjustable
conversion and/or exercise prices were convertible or exercisable into
approximately 192,000,000 shares of our common stock. The number of shares
of common stock that these adjustable securities ultimately may be
converted into or exercised for could prove to be greater than this amount
if the market price of our common stock declines. You could, therefore,
experience substantial dilution of your investment as a result of the
conversion or exercise of our outstanding derivative securities.
The applicable conversion price of our debentures issued to certain
security holders is variable and does not have a lower-limit, therefore the
dilutive effect to our existing security holders is theoretically
limitless. Conversely, because the variable conversion price of these
debentures has an upper limit, an increase in the trading price of a share
of our common stock will result in a limited benefit to existing security
holders with respect to the conversion of these debentures. The following
table sets forth the number of shares issuable upon conversion of the
principal portion of the debentures issued to certain security holders and
outstanding as of January 6, 2003, based upon the indicated hypothetical
trading prices:
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Approximate Percentage
Hypothetical Conversion Number of Shares of Company's
Trading Price Price (1) Issuable(2) Common Stock (3)
- ------------- ----------------- ----------------- ---------------
$.020 $.0100 82,700,000 46.50%
$.015 $.0075 110,300,000 53.75%
$.010 $.0050 165,400,000 63.50%
$.005 $.0025 330,800,000 77.75%
_______________
(1) The conversion price of our debentures is the lower of 50% of the
average of the three lowest intraday trading prices of a share of
our common stock on the OTC Bulletin Board(R) during the twenty
trading days immediately preceding the conversion date, and either
(a) $.06 for the March, May and June 2002 convertible debentures,
or (b) $.01 for the November 2002 convertible debentures and the
additional convertible debentures to be issued in subsequent
investment tranches in connection with the November 2002 debenture
offering. As of January 6, 2003, the applicable conversion price
was $.005.
(2) Our current authorized capital allows us to issue a maximum of
250,000,000 shares of common stock.
(3) Amounts are based on 97,110,266 shares of our common stock
outstanding as of January 6, 2003 plus the corresponding number of
shares issuable. Each of the holders of our convertible debentures
may not convert our debentures into more than 4.9% of our then-
outstanding common stock; however, the holders may waive the 4.9%
limitation, thus allowing the conversion of their debentures into a
number of shares of common stock in excess of 4.9% of our then-
outstanding common stock.
The holders of our convertible debentures may elect to receive
payment for accrued and unpaid interest on our convertible debentures in
shares of our common stock based on the conversion price and on the same
terms described above with respect to conversions of the principal portion
of these debentures. As a result of conversions of the principal or
interest portion of our convertible debentures and related sales of our
common stock by the holders of our convertible debentures, the market price
of our common stock could be depressed, thereby resulting in a significant
increase in the number of shares issuable upon conversion of the principal
and interest portions of these debentures. You could, therefore, experience
substantial dilution of your investment as a result of the conversion of
the principal or interest portions of our convertible debentures.
Our common stock price is subject to significant
volatility, which could result in substantial
losses for investors and in litigation against us.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the three
months ended September 30, 2002, the high and low closing bid prices of our
common stock were $.036 and $.007, respectively. The market price of our
common stock may exhibit significant fluctuations in the future response to
various factors, many of which are beyond our control and which include:
o variations in our quarterly operating results, which variations
could result from, among other things, changes in the needs of one
or more of our customers;
<page>6
o changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
o economic conditions specific to the industries in which we operate;
o announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the
expectations of market makers, securities analysts and investors, the price
of our common stock likely will decline, perhaps substantially. In the
past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources. Consequently, the price
at which you purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. You may be unable to
sell your shares of common stock at or above your purchase price, which may
result in substantial losses to you.
Certain provisions of our articles of
incorporation and bylaws allow concentration of
voting power in one individual, which may, among
other things, delay or frustrate the removal of
incumbent directors or a takeover attempt, even if
such events may be beneficial to our shareholders.
Provisions of our articles of incorporation and bylaws may delay or
frustrate the removal of incumbent directors and may prevent or delay a
merger, tender offer or proxy contest involving ConectiSys that is not
approved by our board of directors, even if those events may be beneficial
to the interests of our shareholders. For example, as of January 6, 2003,
Robert A. Spigno, our Chairman of the Board and Chief Executive Officer,
was the holder of 200,020 shares of our Class A Preferred Stock. As of that
date, Mr. Spigno also held an option, exercisable at $1.00 per share until
its expiration on December 1, 2003, to purchase up to 250,000 additional
shares of our Class A Preferred Stock. Under our articles of incorporation,
each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to our shareholders for action. Consequently, Mr.
Spigno may have sufficient voting power to control the outcome of all
corporate matters submitted to the vote of our common shareholders. Those
matters could include the election of directors, changes in the size and
composition of the board of directors, and mergers and other business
combinations involving ConectiSys. In addition, through his control of the
board of directors and voting power, Mr. Spigno may be able to control
certain decisions, including decisions regarding the qualification and
appointment of officers, dividend policy, access to capital (including
borrowing from third-party lenders and the issuance of additional equity
securities), and the acquisition or disposition of assets by ConectiSys.
Also, the concentration of voting power in the hands of Mr. Spigno could
have the effect of delaying or preventing a change in control of
ConectiSys, even if the change in control would benefit our shareholders,
and may adversely affect the market price of our common stock.
<page>7
THE PRICE RANGE OF COMMON STOCK
TABLE IS REPLACED WITH THE FOLLOWING:
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PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of
our common stock for the periods presented, as obtained from Pink Sheets
LLC, a research service that compiles quote information reported on the
National Association of Securities Dealers composite feed or other
qualified interdealer quotation medium. The quotations listed below reflect
interdealer prices, without retail mark-up, mark-down or commissions, and
may not represent actual transactions. Our common stock trades on the OTC
Bulletin Board(R) under the symbol "CNES."
Price Range
High Low
Year Ended September 30, 2001:
First Quarter (October 1 - December 31) $ 0.325 $ 0.09
Second Quarter (January 1 - March 30) 0.55 0.09
Third Quarter (April 1 - June 30) 0.36 0.16
Fourth Quarter (July 1 - September 30) 0.23 0.11
Year Ended September 30, 2002:
First Quarter $ 0.19 $ 0.095
Second Quarter 0.105 0.07
Third Quarter 0.10 0.016
Fourth Quarter 0.036 0.007
As of January 6, 2003, we had 97,110,266 shares of common stock
outstanding and held of record by approximately 780 shareholders, and the
high and low sale prices of a share of our common stock on the OTC Bulletin
Board(R) on that date were $.012 and $.011, respectively. Within the holders
of record of our common stock are depositories such as Cede & Co. that hold
shares of stock for brokerage firms which, in turn, hold shares of stock
for beneficial owners.
<page>8
THE CAPITALIZATION TABLE
IS REPLACED WITH THE FOLLOWING:
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CAPITALIZATION
The following table sets forth our capitalization as of September
30, 2002. You should read this information together with our consolidated
financial statements and the notes relating to those statements appearing
elsewhere in this prospectus. The table excludes an aggregate of
approximately 302,500,000 shares of common stock that were issuable upon
conversion or exercise of outstanding convertible notes, debentures,
options and warrants as of September 30, 2002.
September 30, 2002
------------------
Long-term debt, less current portion......................... 89,730
============
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 50,000,000 shares.
Class A Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, 200,020 shares issued and outstanding.............. 200,020
Common stock, no par value. Authorized 250,000,000 shares;
issued and outstanding, 64,311,823 shares...................... 18,435,238
Additional paid in capital
Class B Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, no shares issued and outstanding................... 100,000
Common stock, no par value. Stock options and warrants
exercisable................................................. 1,343,695
Beneficial conversion option; debt instruments.................. 724,238
Accumulated deficit............................................. (22,918,163)
---------------
Total shareholders' equity (deficit)......................... $ (2,114,972)
---------------
Total capitalization......................................... $ (2,114,972)
---------------
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
- ---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes and the information
included under the caption "Risk Factors" included elsewhere in this
prospectus. Except for historical information, the following discussion
contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and intentions
and our current beliefs regarding revenues we might earn if we are
successful in implementing our business strategies. See "Special Note
Regarding Forward-Looking Statements" for further information regarding
forward-looking statements. Our actual results may differ materially from
the results discussed in the forward-looking statements as a result of a
number of factors, many of which are beyond our control, including those
factors discussed under "Risk Factors" and other headings in this
prospectus, which could, among other things, cause the price of our common
stock to fluctuate substantially.
<page>9
Overview
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware
and software that will allow for residential and commercial applications.
Our proprietary system is called H-Net(TM), which is a trademark of
ConectiSys.
We are currently in a cost-reduction phase of the development of
our H-Net(TM) system and have completed the development for commercial
production of our H-Net(TM) 4.0 wireless meter reading product. We have not
yet sold any H-Net(TM) systems and we do not expect any significant sales of
our H-Net(TM) systems until mid 2003. Accordingly, we have not earned any
significant revenues from the sale of H-Net(TM) systems. We have no history of
revenues and have incurred significant losses since the beginning of the
development of our H-Net(TM) system. We have a significant accumulated deficit
and negative working capital. As a result of our financial condition, our
independent auditors have issued an opinion questioning our ability to
continue as a going concern.
Critical Accounting Policies and Estimates
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses, and assets and
liabilities, during the periods reported. Estimates are used when
accounting for certain items such as depreciation, likelihood of
realization of certain assets, employee compensation programs and valuation
of intangible assets. We base our estimates on historical experience and
other assumptions that we believe are reasonable under the circumstances.
Actual results may differ from our estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
financial statements. We have based our financial statements on the
assumption of our operations continuing as a going concern. As a result,
we continue to depreciate fixed assets and show certain debts as long-term.
We have written-off the value of technology in prior periods because the
realization of that value was doubtful. Our compensation of consultants
and employees with our capital stock is recorded at estimated market value.
The volatile nature of the price of our common stock causes wide
disparities in certain valuations.
Results of Operations
Comparison of Results of Operations for the Fiscal Years Ended
September 30, 2002 and 2001
We did not generate any revenues for the fiscal years ended
September 30, 2002 and September 30, 2001. Cost of sales for fiscal 2002
was $73,667 as compared to $37,930 for fiscal 2001, an increase of $35,737
or 94.2%. This increase in cost of sales primarily was due to an increase
in production of models and prototypes of our H-Net(TM) products that are used
for sales and marketing purposes.
General and administrative expenses increased by $29,237 or 1.6% to
$1,808,657 for fiscal 2002 as compared to $1,779,420 for fiscal 2001.
Interest expense increased by $127,190 or 37.7% to $464,410 during
fiscal 2002 as compared to $337,220 for fiscal 2001. This increase in
interest expense primarily was due to an increase in borrowings under our
convertible debentures and other promissory notes during fiscal 2002.
<page>10
Net loss for fiscal 2002 increased by $192,165 or 8.9% to
$2,346,732 as compared to a net loss of $2,154,567 for fiscal 2001.
Liquidity and Capital Resources
During the twelve months ended September 30, 2002 we financed our
operations solely through private placements of securities. Because we have
recently emerged from the development stage, we have never generated any
revenue from operations. Our consolidated financial statements as of and
for the years ended September 30, 2002 and 2001 have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.
As of September 30, 2002, we had negative working capital of
approximately $2,077,000 and an accumulated deficit of approximately
$22,918,000. As of that date, we had approximately $55,000 in cash and cash
equivalents. We had accounts payable and accrued compensation expenses of
approximately $1,117,000. We had other liabilities, including amounts due
to officers, accrued interest, notes and convertible debts of approximately
$1,104,000, including those issued prior to the beginning of fiscal year
2002. To the extent convertible debentures or promissory notes that we have
issued are converted into shares of common stock, we will not be obligated
to repay the converted amounts.
Cash used in our operating activities totaled approximately
$1,012,000 for the twelve months ended September 30, 2002 as compared to
approximately $492,000 for the twelve months ended September 30, 2001. No
cash was provided by our investing activities for the twelve months ended
September 30, 2002 and September 30, 2001.
Cash provided by our financing activities totaled $1,067,000 for
the twelve months ended September 30, 2002 as compared to $475,000 for the
twelve months ended September 30, 2001. We raised all of the cash provided
by financing activities during the twelve months ended September 30, 2002
from the issuance of convertible debentures and/or promissory notes.
In April 2001, we issued an 8% Convertible Note to Laurus Master
Fund, Ltd., or Laurus, in the principal amount of $300,000. We have been
unable to repay the amounts owed under this note and we have failed to
satisfy our obligation to register for resale the shares of common stock
underlying this note. On February 15, 2002, and as amended on April 2,
2002, we agreed to terms with Laurus regarding our obligations under this
note. Under the terms of this agreement, we paid to Laurus $100,000 in cash
on February 19, 2002 and $50,000 in cash on April 5, 2002. However, we have
not met all the terms of the February 15, 2002 agreement, as well as, the
original terms under the April 2001 Convertible Note. We are currently
working with Laurus to pay down the remaining balance of the original April
2001 Convertible Note. As of September 30, 2002, approximately $129,000 of
principal and accrued and unpaid interest under the original note remained
outstanding. As of January 6, 2003, approximately $60,000 of principal and
accrued and unpaid interest under this note remained outstanding.
In February 2002, we borrowed $340,000 from the Mercator Momentum
Fund in order to make the initial $100,000 payment under our settlement
arrangement with Laurus and to fund continuing development of our H-NetTM
system. This loan from the Mercator Momentum Fund is a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, we owed
Mercator Momentum Fund approximately $243,000 of principal and accrued and
unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in
the form of 5,861,814 shares of our common stock into its name as a result
of our default on its loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator Momentum Fund, 3,500,000 shares of
our common stock were issued and pledged as collateral by us in February
2002, and 2,361,814 shares of our common stock were pledged as collateral
by Robert Spigno, our Chief Executive Officer, in February 2002.
<page>11
On June 21, 2002, Mercator Momentum Fund filed an action against
ConectiSys Corporation, Robert A. Spigno and Patricia A. Spigno in the
Superior Court of California, County of Los Angeles (Case No. BC276283) for
breach of promissory note, foreclosure of security interests and fraud and
deceit. Mr. Spigno is the Chairman of the Board and a director of our
company and is also our Chief Executive Officer. Ms. Spigno is our
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
complaint relates to the loan in February 2002 from Mercator Momentum Fund
of $340,000, as more particularly described above. This case is currently
in the discovery phase. We believe that Mercator Momentum Fund's claims are
without merit because, among other factors, we have affirmative defenses to
those claims, including usury and the satisfaction of amounts owed under
loan from Mercator Momentum Fund as a result of the enforcement by Mercator
Momentum Fund of its security interest in shares of our common stock. We
intend to vigorously defend against these claims and to pursue appropriate
counterclaims against Mercator Momentum Fund. Due to the size of the amount
owed to Mercator Momentum Fund and our poor financial condition, an adverse
decision in the litigation against us could have a materially negative
impact on our financial condition and business prospects, including the
development of our H-Net(TM) system.
In March 2002, we issued $300,000 of our secured convertible
debentures to four accredited investors in the first stage of a three-stage
offering. The secured convertible debentures are due March 29, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $225,000. As of January 6,
2003, an aggregate of $176,960 of principal plus related accrued and unpaid
interest relating to the debentures issued in March 2002 remained
outstanding.
In May 2002, we issued $150,000 of our secured convertible
debentures to four accredited investors in the second stage of a three-
stage offering. The secured convertible debentures are due May 10, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
750,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $140,000. As of January 6,
2003, an aggregate of $150,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in March 2002 remained
outstanding.
In June 2002, we issued $300,000 of our secured convertible
debentures to four accredited investors in the third stage of a three-stage
offering. The secured convertible debentures are due June 17, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $237,500. As of January 6,
2003, an aggregate of $300,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in June 2002 remained
outstanding.
In November 2002, we issued $200,000 of our secured convertible
debentures to three accredited investors in the first stage of a three-
stage offering. The secured convertible debentures are due November 27,
2003 and provide for interest at the rate of 12% per annum. The secured
convertible debentures were accompanied by warrants to purchase up to an
aggregate of 1,000,000 shares of common stock. The net proceeds of that
<page>12
offering, after payment of related expenses, were approximately $145,000.
The investors are obligated to purchase an additional $150,000 of our
secured convertible debentures and warrants to purchase up to 750,000
shares of common stock within 15 days after the filing date of a
registration statement covering the resale of shares of common stock
underlying the convertible debentures and warrants. Additionally, the
investors are obligated to purchase an additional $150,000 of our secured
convertible debentures and warrants to purchase up to 750,000 shares of
common stock within 5 days after the effective date of the registration
statement covering the resale of shares of common stock underlying the
convertible debentures and warrants. As of January 6, 2003, the full amount
of the debentures issued in November 2002 remained outstanding.
As of January 6, 2003 we had two additional notes due September 1,
2003 payable in the aggregate approximate amount of $254,000 of which one
note in the principal amount of approximately $81,000, plus accrued
interest of approximately $11,000, was held by Robert Spigno, our Chairman
of the Board and Chief Executive Officer. These notes bear interest at an
annual rate of 18%.
Our continued operations are dependent on securing additional
sources of liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of and
for the years ended September 30, 2002 and 2001 have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As discussed
in this document and in Note 1 to our consolidated financial statements for
the years ended September 30, 2002 and 2001, we have suffered recurring
losses from operations and at September 30, 2002 had net capital and
working capital deficiencies. These factors, among others, raised
substantial doubt about our ability to continue as a going concern and led
our independent certified public accountants to modify their unqualified
opinion to include an explanatory paragraph related to our ability to
continue as a going concern. The consolidated financial statements included
in this document do not include any adjustments that might result from the
outcome of this uncertainty.
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Deteriorating global economic
conditions may cause prolonged declines in investor confidence in and
accessibility to capital markets. Further, our current secured convertible
debenture financing documents contain notice and right of first refusal
provisions and the grant of a security interest in substantially all of our
assets in favor of the convertible debenture investors, all of which
provisions will restrict our ability to obtain debt and/or equity
financing.
Any future financing that we may obtain may cause significant
dilution to existing stockholders. Any debt financing or other financing of
securities senior to common stock that we are able to obtain will likely
include financial and other covenants that will restrict our flexibility.
At a minimum, we expect these covenants to include restrictions on our
ability to pay dividends on our common stock. Any failure to comply with
these covenants would have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay,
scale back or eliminate portions of our operations and product and service
development efforts or to obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to certain of
our technologies or potential products or other assets. Accordingly, the
inability to obtain such financing could result in a significant loss of
ownership and/or control of our proprietary technology and other important
assets and could also adversely affect our ability to fund our continued
operations and our product and service development efforts that
historically have contributed significantly to our competitiveness.
<page>13
We are completing research and development of our H-Net(TM) system
with the goal of deployment of the H-Net(TM) system in mid 2003. We believe
that if we are successful in deploying our H-Net(TM) system, we will begin to
generate revenues from our business activities.
THE FOLLOWING SUBSECTIONS OF THE BUSINESS
SECTION ARE REPLACED WITH THE FOLLOWING:
- -----------------------------------------
BUSINESS
Overview
We were incorporated in Colorado on February 2, 1986 under the name
Coastal Financial Corp. On December 5, 1994, Coastal Financial Corp.
changed its name to BDR Industries, Inc. which changed its name on October
16, 1995, to ConectiSys Corporation.
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware
and software that will allow for residential and commercial applications.
Our proprietary system is called H-Net(TM), which is a trademark of
ConectiSys.
We are currently in a cost-reduction phase of the development of
our H-Net(TM) system and have completed the development for commercial
production of our H-Net(TM) 4.0 wireless meter reading product. We have not
yet sold any H-Net(TM) systems and we do not expect any significant sales of
our H-Net(TM) systems until mid 2003. Accordingly, we have not earned any
significant revenues from the sale of H-Net(TM) systems. We have no history of
revenues and have incurred significant losses since the beginning of the
development of our H-Net(TM) system. We have a significant accumulated deficit
and negative working capital. As a result of our financial condition, our
independent auditors have issued an opinion questioning our ability to
continue as a going concern.
Our Strategy
We have strived to develop expertise relating to AMR systems and
products. Our goal is to become a leading provider of products and services
relating to data acquisition from remote locations and data collection at
centralized locations. Our business strategy to achieve this goal includes
the following elements:
o Develop strategic relationships. We have explored and intend to
continue to explore the possibility of entering into strategic
relationships with manufacturers of energy meters, utility
companies, energy providers and others in order to promote the
adoption of our H-Net(TM) system within the energy and AMR industries.
o Establish outsource manufacturing for full-scale commercial
production. We have the means of outsourcing small-scale
production of the products employed in our H-Net(TM) system. We intend
to continue the cost- reduction phase of our H-Net(TM) system's
development and in doing so, we intend to examine various
manufacturing alternatives, including strategic relationships with
manufacturers of energy meters and third-party manufacturing of the
products employed in our H-Net(TM) system for use in energy meters.
o Build market share for our products. We intend to establish
ourselves as the source for comprehensive, low-cost AMR solutions
and plan to focus on building our own market share for our H-Net(TM)
system and further develop our H-Net(TM) system where market demand is
identified. We also plan to develop new products and enhancements
to meet or exceed the evolving requirements of both centralized and
remote applications of our technologies.
<page>14
o Intensify our marketing activities. As funds become available, we
intend to invest in a comprehensive targeted, product-specific
marketing program to raise awareness of ConectiSys and our H-Net(TM)
system and in order to attract customers.
o Continue to develop wireless products. We intend to continue to
invest in research and development of wireless products to meet the
needs of the AMR industry. We believe that the expertise that we
have developed in creating our existing H-Net(TM) system will enable
us to enhance our products, develop new products and services and
respond to emerging technologies in a cost-effective and timely
manner.
H-Net(TM) Product Development and Pilot Programs
Our product development efforts are directed toward developing an
AMR solution in the form of our H-Net(TM) system. We believe that our existing
expertise in data transmission devices provides us with a strong technology
base to pursue this objective. Our product development efforts focus on the
following principles:
o Development of New Products and Technology. We plan to assess
domestic and international market trends, with the focus of
developing new products designed to meet emerging market demands.
In developing new products, we plan to attempt to combine our
existing technology base with new technologies to provide a broader
range of automation and data communications and data acquisition
solutions to end users.
o Improvement of Existing Technology. We seek to expand the features
and functionality of our existing H-Net(TM) system technology through
modifications and enhancements to meet the changing needs of the
marketplace. We are reviewing the design of our products to
determine areas of potential cost savings or enhanced product
quality and reliability.
We believe our future success will depend, in part, upon our
ability to expand and enhance the features of our H-Net(TM) system and to
develop and introduce new products designed to meet changing customer needs
on a cost- effective and timely basis. Consequently, failure by us to
respond on a timely basis to technological developments, changes in
industry standards or customer requirements, or any significant delay in
product development or introduction, could have a material adverse effect
on our business and results of operations. We cannot assure you that we
will respond effectively to technological changes or new product
announcements by others or that we will be able to successfully develop and
market new products or product enhancements.
On February 15, 2000, we successfully launched our H-Net(TM) pilot
test program in Los Angeles, California. Although this initial pilot
program was small, it was a working model of our first-generation H-Net(TM)
system that demonstrated the capabilities of our H-Net(TM) system as an AMR
solution. This initial pilot program demonstrated the technology of our H-
Net(TM) system, which remotely acquires near real-time data from an energy
meter, processes this data to show energy usage and cost, and can display
this information on the Internet.
In September 2000, we successfully launched a second pilot test
program for which we developed a portable wireless network capable of
demonstrating our H-Net(TM) system anywhere in the country.
<page>15
Based upon the success of our early-generation H-Net(TM) systems in
our first two pilot test programs in demonstrating our H-Net(TM) system as a
viable means of remotely reading energy meters and collecting the resulting
data, we successfully launched a third pilot test program in September
2001.
During 2002, we reached an understanding for the evaluation of our
H-Net(TM) system in the Advanced Power and Energy Program at the University of
California, Irvine. The program was to provide three levels of extensive
laboratory and field-testing and evaluation.
The Advanced Power and Energy Program was engaged in the
development of test protocols for distributed resources, including micro
turbine generators, fuel cells, and combined heat and power applications.
The Advanced Power and Energy Program had plans to undertake the
development of test protocols for advanced meter reading and real time-of-
use metering under the auspices of stakeholder agencies such as the
California Energy Commission. As part of this program, the University of
California, Irvine, through its Advanced Power and Energy Program, planned
to test and evaluate technologies such as our H-Net(TM) system with the
understanding that its mission was to accelerate the market viability of
energy-related technologies and systems.
We have been informed by the director of the Advanced Power and
Energy Program that it is currently reorganizing. The director has further
informed us that the Advanced Power and Energy Program has changed its
priorities and does not intend to test real time meter reading devices.
Since we have an agreement with the director of the Advanced Power and
Energy Program to test our H-Net(TM) system, we will continue to pursue
testing and the completion of a pilot program with the Advanced Power and
Energy Program. We believe that the current budget crisis in the State of
California may cause sever financial cut-backs at all California state
university-operated research facilities and that this budget crisis is the
cause of the recent reorganization by the Advanced Power and Energy
Program.
We believe that if we are able to cause the Advanced Power and
Energy Program to complete its testing and pilot program relating to our H-
Net(TM) system, that the Advanced Power and Energy Program will provide our H-
Net(TM) system a national platform upon which to prove itself as a viable,
efficient and reliable method of automated meter reading at a cost that is
comparable to the current physical methods of meter reading.
We are actively pursuing and planning other field testing programs
with various utility companies and energy service providers across the
country. However, we expect that future field testing programs will be in
conjunction with the first stages of sales or licensing of our H-Net(TM)
system to utility companies, energy service providers and other parties.
Operations
During the initial design and engineering phases for our H-Net(TM)
system, we maintained low overhead costs and we plan to continue to do so
until manufacturing and sales of our H-Net(TM) system are underway. We plan
to hire additional personnel as needed during the coming year, including
managerial, clerical, administration, sales, marketing, and customer
service personnel.
We plan to lease suitable office facilities for our operations
within the Southern California area. We plan to initially utilize existing
manufacturers to produce our products and will therefore likely not have a
short-term need to lease or build manufacturing facilities. We intend to
operate not principally as a manufacturer of products, but as a provider of
comprehensive, cost-effective AMR solutions, and we plan to outsource
manufacturing of the hardware employed in our H-Net(TM) system in order to
achieve the highest cost-efficiencies.
<page>16
Employees
We have four full time employees and a five person advisory board.
Our employees are involved in executive, corporate administration,
operations, and sales and marketing functions. We also use the services of
outside consultants and experts on many of our projects to help reduce
costs. We consider our relations with our employees to be good. None of our
employees is represented by a labor union.
Facilities
Our principal operation center is located at 24730 Avenue Tibbitts,
Suite 130, Valencia, California 91355. This 1,000 square foot space is
leased for approximately $1,260 per month.
We believe that our facilities are adequate for our needs for the near
future.
Legal Matters
In February 2002, we borrowed $340,000 from the Mercator Momentum
Fund in order to make the initial $100,000 payment under our settlement
arrangement with Laurus and to fund continuing development of our H-Net(TM)
system. This loan from the Mercator Momentum Fund is a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, we owed
Mercator Momentum Fund approximately $243,000 of principal and accrued and
unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in
the form of 5,861,814 shares of our common stock into its name as a result
of our default on its loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator Momentum Fund, 3,500,000 shares of
our common stock were issued and pledged as collateral by us in February
2002, and 2,361,814 shares of our common stock were pledged as collateral
by Robert Spigno, our Chief Executive Officer, in February 2002.
On June 21, 2002, Mercator Momentum Fund filed an action against
ConectiSys Corporation, Robert A. Spigno and Patricia A. Spigno in the
Superior Court of California, County of Los Angeles (Case No. BC276283) for
breach of promissory note, foreclosure of security interests and fraud and
deceit. Mr. Spigno is the Chairman of the Board and a director of our
company and is also our Chief Executive Officer. Ms. Spigno is our
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
complaint relates to the loan in February 2002 from Mercator Momentum Fund
of $340,000, as more particularly described above. The case is currently in
the discovery phase. We believe that Mercator Momentum Fund's claims are
without merit because, among other factors, we have affirmative defenses to
those claims, including usury and the satisfaction of amounts owed under
loan from Mercator Momentum Fund as a result of the enforcement by Mercator
Momentum Fund of its security interest in shares of our common stock. We
intend to vigorously defend against these claims and to pursue appropriate
counterclaims against Mercator Momentum Fund. Due to the size of the amount
owed to Mercator Momentum Fund and our poor financial condition, an adverse
decision in the litigation against us could have a materially negative
impact on our financial condition and business prospects, including the
development of our H-Net(TM)system.
<page>17
In 1997, the Securities and Exchange Commission filed suit in the
United States District Court in the Central District of California against
ConectiSys and other individuals seeking permanent injunctions against all
defendants and civil penalties from those individuals based on alleged
violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities Act of
1933, Sections 15(c) and 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder in connection with the sale of common stock of
ConectiSys in 1995 and 1996. Specifically, the Securities and Exchange
Commission alleged that a fraudulent scheme was orchestrated and directed
by ConectiSys and the other defendants to engage in the sale and
distribution of unregistered shares of the common stock of ConectiSys by
creating the appearance of an active trading market for the stock of
ConectiSys and artificially inflating the price of its shares. After the
conduct of a trial of this matter without a jury, the court found in favor
of the Securities and Exchange Commission on the claim that ConectiSys
violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933.
ConectiSys was not found to have violated section 10(b), 10(b-5), or 15(c)
of the Securities Exchange Act of 1934. We were subsequently ordered to
disgorge proceeds totaling $175,000, but appealed the judgment against us
in favor of the Securities and Exchange Commission.
In March 1999, we agreed with the Securities and Exchange
Commission to the terms of a settlement of its litigation against us. Under
the terms of that settlement, we dismissed our then-pending appeal of a
judgment against us in favor of the Securities and Exchange Commission and
accepted a permanent injunction against us prohibiting actions that would
violate federal securities laws in connection with the offer, purchase or
sale of securities. The Securities and Exchange Commission agreed to waive
a requirement of the judgment under appeal that we disgorge $175,000 of
proceeds from the sale of our common stock due to our inability to pay this
amount. On March 9, 1999, an amended final judgment of permanent injunction
and other relief memorializing these agreements was entered in connection
with the execution by us of a consent to entry of injunction. An injunction
of this nature is viewed unfavorably by analysts and investors and may make
it more difficult for us to raise additional debt or equity financing
necessary to run our business.
THE FOLLOWING SUBSECTIONS OF THE MANAGEMENT
SECTION ARE REPLACED WITH THE FOLLOWING:
- ---------------------------------------------------------------------------
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages,
positions, business experience and education as of January 6, 2003 are as
follows:
Name Age Position
- ------------------------- -- ----------------------------------
Robert A. Spigno (1) 48 Chairman of the Board, Chief
Executive Officer and Director
Lawrence Muirhead (1) 43 Chief Technology Officer and
Director
Patricia A. Spigno 45 Chief Financial Officer, Treasurer
and Secretary
Melissa McGough (1) 26 Corporate Administrator and
Director
_______________
(1) Member of Stock Option Committee.
<page>18
Compensation of Executive Officers
The Summary Compensation Table below provides information
concerning the annual and long-term compensation for services in all
capacities to ConectiSys of our Chief Executive Officer, our Chief
Technology Officer and our Chief Financial Officer, or the named
executives, during the years ended September 30, 2000, 2001 and 2002. There
were no other executive officers whose annual salary and bonus compensation
exceeded $100,000 during the year ended September 30, 2002.
<Table>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation ($)
------------------- ------- --------- ----------- ------------ ----------------
Robert A. Spigno, 2002 $160,000 $80,000 -- --
Chief Executive Officer 2001 $160,000 $80,000 6,453,634 --
2000 $160,000 $80,000 -- $13,750(2)
Lawrence Muirhead, 2002 $150,000 -- -- --
Chief Technology Officer 2001 $150,000 -- 2,000,000 --
2000 $150,000 -- -- --
Patricia A. Spigno, 2002 $ 80,000 $40,000 -- --
Chief Financial Officer 2001 $ 80,000 $40,000 500,000 --
and Secretary 2000 $ 80,000 $40,000 -- $13,750(2)
_______________
(1) Amounts represent approximate fair market value on the date of
grant of common stock granted.
(2) Represents amounts paid in connection with the rental of office
space to ConectiSys.
</table>
Stock Option Grants in 2002
In fiscal 2002, no options or stock appreciation rights were
granted to the named executives.
<page>19
Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares acquired and
value realized upon exercise of options during the fiscal year ended
September 30, 2002 and the number of exercisable and unexercisable in-the-
money stock options and their values at September 30, 2002 for the named
executives. An option is "in-the-money" if the fair market value for the
underlying securities exceeds the exercise price of the option.
<table>
Option Table
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value ($)of Unexercised
Shares Unexercised Options In-the-Money Options at
Acquired on Value September 30, 2002 September 30, 2002 (1)
Name Exercise Realized ($) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
--------------------- ------------ ------------ -------------- ---------------- -------------- ----------------
Robert A. Spigno --- --- 6,453,634 --- --- ---
Lawrence Muirhead --- --- --- 2,000,000 --- ---
Patricia Spigno --- --- 500,000 --- --- ---
_______________
(1) The closing sale price of our common stock on the OTC Bulletin
Board(R) as of September 30, 2002 was $.012.
</Table>
Long-Term Incentive Plan Awards
In fiscal 2002, no awards were given to named executives under
long-term incentive plans.
Compensation of Directors
Our directors do not receive any compensation in their capacity as
members of the board of directors, but may be reimbursed for reasonable
expenses incurred in connection with attendance of meetings of the board of
directors.
The advisors to our board of directors each receive 250,000 shares
of common stock as yearly compensation for their advisory services.
Repricing of Options and SARs
Except as specified below, no adjustments to or repricing of stock
options or stock appreciation rights previously awarded to the named
executives occurred in fiscal 2002.
On June 28, 2002, we repriced Robert Spigno's fully-vested option
to purchase up to 500,000 shares of Class B Preferred Stock from an
exercise price of $2.50 per share to an exercise price of $.50 per share.
The exercise price of $.50 per share equates to $.05 per share of common
stock if the Class B Preferred Stock were converted, which was in excess of
the price of our common stock on that date.
<page>20
THE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SECTION IS REPLACED WITH THE FOLLOWING:
- --------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, our board of directors set the compensation for
Robert A. Spigno, our Chairman of the Board and Chief Executive Officer.
Mr. Spigno has executed an employment agreement with ConectiSys effective
October 2, 1995, as amended by employment agreement amendments effective
July 24, 1996, August 11, 1997, September 1, 1999 and March 27, 2000 that
provide for annual salary of $160,000 and a performance bonus of up to 50%
of Mr. Spigno's annual salary. On March 27, 2000, Mr. Spigno was granted a
fully- vested five-year option to purchase up to 2,000,000 shares of common
stock at an exercise price of $.3864 per share, which was 50% of the
closing price of a share of our common stock on that date. On September 30,
1999, Mr. Spigno was granted a fully-vested three-year option to purchase
up to 500,000 shares of Class B Preferred Stock at an exercise price of
$5.00 per share, which is $.50 per share of common stock on an as-converted
basis, which was the closing price of a share of our common stock on that
date. On September 11, 2001, the expiration date of this option was
extended to November 1, 2004 and the exercise price per share was reduced
to $2.50 per share, which is $.25 per share of common stock on an as-
converted basis, which was the closing price of a share of our common stock
on that date. On October 21, 2001 Mr. Spigno was granted a fully-vested
three-year option to purchase up to 310,000 shares of Class A Preferred
Stock at an exercise price of $1.00 per share, which was the estimated
value of the Class A Preferred Stock on that date.
In August 1998, our board of directors set the compensation for
Lawrence Muirhead, our Chief Technology Officer. Mr. Muirhead has executed
an employment agreement with ConectiSys effective August 1, 1998, that
provides for annual salary compensation of $150,000 and a performance bonus
of up to 50% of Mr. Muirhead's annual salary. On November 22, 1999, Mr.
Muirhead was granted an option initially expiring December 31, 2002 to
purchase up to 2,000,000 shares of common stock at an exercise price of
$.50 per share, which was the closing price of a share of our common stock
on that date. This option vests upon the achievement of certain specified
performance criteria. On January 6, 2003, we extended the expiration date
of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for
Patricia A. Spigno, our Chief Financial Officer and Secretary. Ms. Spigno
has executed an employment agreement with ConectiSys effective October 2,
1996, as amended by employment agreement amendments effective July 24,
1996, September 1, 1999 and March 27, 2000 that provide for annual salary
of $80,000 and a performance bonus of up to 50% of Ms. Spigno's annual
salary. On March 27, 2000, Ms. Spigno was granted a fully-vested two-year
option to purchase up to 500,000 shares of common stock at an exercise
price of $.38 per share, which was 50% of the closing price of a share of
our common stock on that date.
Effective August 1995, we leased office space from S.W. Carver
Corporation, a company owned by Robert Spigno and Patricia Spigno. The
original lease period was twelve months, renewable annually each April at
the option of ConectiSys. Effective April 1998, the monthly rent was
increased from $2,000 to $2,500. Aggregate lease expenditures for the ten-
month period ended September 30, 1999 were $25,000 and for the year ended
September 30, 2000 were $27,500. This office space lease was terminated in
September 2000. We believe the lease rates were at fair market value.
At September 30, 2000, Robert Spigno had made cumulative cash
advances to ConectiSys of $75,000. On October 1, 2000, these advances were
memorialized in a revolving promissory note, executed by ConectiSys in
favor of Mr. Spigno, due on demand, at an annual interest rate of 18%.
During the year ended September 30, 2001, additional cash advances were
made by Mr. Spigno under this note in the amount of $20,000 and we repaid
<page>21
an aggregate of $50,000 to Mr. Spigno on this note. As of September 30,
2001, total accrued and unpaid interest was $11,880, resulting in a $56,880
balance under the note. On September 30, 2001, we executed a new
promissory note due September 1, 2002 initially in that amount. For the
year ended September 30, 2000, we incurred interest expenses in the amount
of $21,766, including $10,583 associated with the assumption by Mr. Spigno
of a promissory note due S.W. Carver Corporation, which was repaid in May
2000. On September 1, 2002, we executed a new promissory note due September
1, 2003 initially in the aggregate amounts owed to Mr. Spigno as of that
date. The aggregate amounts due Mr. Spigno under these arrangements as of
September 30, 2002 was $87,564.
At September 30, 2000, Patricia Spigno had made cumulative cash
advances to ConectiSys of $61,945, under a revolving promissory note
effective October 1, 2000, executed by ConectiSys in favor of Ms. Spigno,
due on demand, at an annual interest rate of 18%. During the year ended
September 30, 2001, we repaid an aggregate of $40,681 to Ms. Spigno on this
note. As of September 30, 2001, total accrued and unpaid interest was
$4,610, resulting in a $25,874 balance under the note. On September 30,
2001, we executed a new promissory note due September 1, 2002 initially in
that amount. Ms. Spigno also borrowed on a personal credit card for our
benefit in the amount of $18,455, bringing our total obligation due Ms.
Spigno at September 30, 2001 to $44,329. During the year ended September
30, 2002, additional loan advances from Ms. Spigno were $19,500 and accrued
interest was $2,269 and we repaid $39,500, resulting in an aggregate loan
balance due at September 30, 2002 of $8,143. The loan balance is currently
due on demand and continues to accrue interest at the rate of 18% per year.
On March 27, 2000, Robert Spigno was granted a fully-vested five-
year option to purchase up to 2,000,000 shares of common stock at an
exercise price of $.3864 per share, which was 50% of the closing price of a
share of our common stock on that date.
On March 27, 2000, Patricia Spigno was granted a fully-vested two-
year option to purchase up to 500,000 shares of common stock at an exercise
price of $.38 per share, which was 50% of the closing price of a share of
our common stock on that date.
On May 22, 2000, we issued 2,056,346 shares of common stock and
20,000 shares of Class A Preferred Stock to Robert Spigno upon the exercise
of options in exchange for an aggregate exercise price of $509,972
represented by the cancellation of debt and accrued compensation.
On July 31, 2000 we issued 34,857 shares of common stock valued at
$10,962 to Robert Spigno as compensation for services rendered.
On July 31, 2000 we issued 89,886 shares of common stock valued at
$28,269 to Lawrence Muirhead as compensation for services rendered.
On July 31, 2000 we issued 9,157 shares of common stock valued at
$2,880 to Melissa McGough as compensation for services rendered.
On July 31, 2000 we issued 357,968 shares of common stock valued at
$112,581 to Patricia Spigno as compensation for services rendered.
On September 28, 2000 we issued 47,521 shares of common stock
valued at $75,083 to Lawrence Muirhead as a hiring bonus that was due Mr.
Muirhead but that had not yet been paid.
On October 30, 2000 we issued 67,959 shares of common stock valued
at $14,815 to Robert Spigno as compensation for services rendered.
<page>22
On October 30, 2000 we issued 60,868 shares of common stock valued
at $13,269 to Lawrence Muirhead as compensation for services rendered.
On October 30, 2000 we issued 12,950 shares of common stock valued
at $2,823 to Patricia Spigno as compensation for services rendered.
On April 23, 2001 we issued 2,293,855 shares of common stock valued
at $247,102 to Robert Spigno as compensation for services rendered.
On April 23, 2001 we issued 226,118 shares of common stock valued
at $30,450 to Lawrence Muirhead as compensation for services rendered.
On April 23, 2001 we issued 333,343 shares of common stock valued
at $45,000 to our then president, Rodney Lighthipe as compensation for
services rendered.
On April 23, 2001 we issued 50,000 shares of common stock valued at
$5,290 to Melissa McGough as a bonus.
On April 23, 2001 we issued 452,954 shares of common stock valued
at $48,943 to Patricia Spigno as compensation for services rendered.
On July 20, 2001 we issued 79,651 shares of common stock valued at
$14,815 to Robert Spigno as compensation for services rendered.
On July 20, 2001 we issued 89,946 shares of common stock valued at
$16,729 to Lawrence Muirhead as compensation for services rendered.
On July 20, 2001 we issued 120,968 shares of common stock valued at
$22,500 to our then president, Rodney Lighthipe as compensation for
services rendered.
On July 20, 2001 we issued 25,637 shares of common stock valued at
$4,768 to Patricia Spigno as compensation for services rendered.
On September 11, 2001, Robert Spigno was granted a fully-vested
option to purchase up to 500,000 shares of Class B Preferred Stock at an
exercise price of $2.50 per share. This equates to $.25 per share of common
stock if the Class B Preferred Stock were converted, which was the price of
our common stock on that date.
On October 21, 2001, Mr. Spigno was granted a fully-vested option
to purchase up to 310,000 shares of Class A Preferred Stock at an exercise
price of $1.00 per share, which was the estimated value on that date.
On December 19, 2001, Mr. Spigno exercised a portion of an option
to purchase 60,000 shares of Class A Preferred Stock for $1.00 per share,
which was the estimated value on that date.
In March 2002, we issued to AJW Partners, LLC, New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC (f/k/a Pegasus
Capital Partners, LLC) and AJW Offshore, Ltd. (f/k/a AJW/New Millennium
Offshore, Ltd.) an aggregate of $300,000 of our 12% Convertible Debentures
due March 29, 2003, or the March 2002 offering, which were accompanied by
warrants to purchase up to an aggregate of 1,500,000 shares of common
stock. The debentures are immediately convertible into shares of common
stock at an initial per share price equal to the lesser of $.06 and 50% of
the average of the lowest three intraday trading prices during the 20
trading days immediately preceding a conversion. The warrants are
immediately exercisable for shares of common stock at an initial per share
price equal to the lesser of $.045 and the average of the lowest three
intraday trading prices during the 20 trading days immediately preceding a
conversion. As of September 30, 2002, $206,870 in principal amount plus
related interest on the March 2002 debentures was outstanding.
In May 2002, we issued to AJW Partners, LLC, New Millennium Capital
Partners II, LLC, AJW Qualified Partners, LLC (f/k/a Pegasus Capital
Partners, LLC) and AJW Offshore, Ltd. (f/k/a AJW/New Millennium Offshore,
Ltd.) an aggregate of $150,000 of our 12% Convertible Debentures due May
10, 2003, or the May 2002 offering, which were accompanied by warrants to
purchase up to an aggregate of 750,000 shares of common stock. The
debentures are immediately convertible into shares of common stock at an
initial per share price equal to the lesser of $.06 and 50% of the average
of the lowest three intraday trading prices during the 20 trading days
immediately preceding a conversion. The warrants are immediately
exercisable for shares of common stock at an initial per share price equal
to the lesser of $.045 and the average of the lowest three intraday trading
prices during the 20 trading days immediately preceding a conversion. As of
September 30, 2002, $150,000 in principal amount plus related interest on
the May 2002 debentures was outstanding.
In June 2002, we issued to AJW Partners, LLC, New Millennium
Capital Partners II, LLC, AJW Qualified Partners, LLC (f/k/a Pegasus
Capital Partners, LLC) and AJW Offshore, Ltd. (f/k/a AJW/New Millennium
Offshore, Ltd.) an aggregate of $300,000 of our 12% Convertible Debentures
due June 17, 2003, or the June 2002 offering, which were accompanied by
warrants to purchase up to an aggregate of 1,500,000 shares of common
stock. The debentures are immediately convertible into shares of common
stock at an initial per share price equal to the lesser of $.06 and 50% of
the average of the lowest three intraday trading prices during the 20
trading days immediately preceding a conversion. The warrants are
immediately exercisable for shares of common stock at an initial per share
price equal to the lesser of $.045 and the average of the lowest three
intraday trading prices during the 20 trading days immediately preceding a
conversion. As of September 30, 2002, $300,000 in principal amount plus
related interest on the June 2002 debentures was outstanding.
In June 2002, Laurus Master Fund transferred into its name 519,865
shares of our common stock pledged by Lawrence Muirhead as security for a
loan made by Laurus to us in April 2001 in the original principal amount of
$300,000.
In June 2002, Mercator Momentum Fund transferred into its name
2,361,814 shares of our common stock pledged by Robert Spigno as security
for a loan made by Mercator to us in February 2002 in the original
principal amount of $340,000.
On June 28, 2002, we repriced Robert Spigno's fully-vested option
to purchase up to 500,000 shares of Class B Preferred Stock from an
exercise price of $2.50 per share to an exercise price of $.50 per share.
The exercise price of $.50 per share equates to $.05 per share of common
stock if the Class B Preferred Stock were converted, which was in excess of
the price of our common stock on that date.
In July 2002, Laurus Master Fund transferred into its name 47,521
shares of our common stock pledged by Lawrence Muirhead as security for a
loan made by Laurus to us in April 2001 in the original principal amount of
$300,000.
<page>23
In August 2002, Laurus Master Fund transferred into its name
294,857 shares of our common stock pledged by Robert Spigno as security for
a loan made by Laurus to us in April 2001 in the original principal amount
of $300,000.
In September 2002, Laurus Master Fund transferred into its name
117,021 shares of our common stock pledged by Lawrence Muirhead as security
for a loan made by Laurus to us in April 2001 in the original principal
amount of $300,000.
In September 2002, Laurus Master Fund transferred into its name
500,000 shares of our common stock pledged by Robert Spigno as security for
a loan made by Laurus to us in April 2001 in the original principal amount
of $300,000.
In October 2002, Laurus Master Fund transferred into its name
279,539 shares of our common stock pledged by Robert Spigno as security for
a loan made by Laurus to us in April 2001 in the original principal amount
of $300,000.
In October 2002, Laurus Master Fund transferred into its name
1,458,059 shares of our common stock pledged by Patricia Spigno as security
for a loan made by Laurus to us in April 2001 in the original principal
amount of $300,000.
In November 2002, Laurus Master Fund transferred into its name
1,556,346 shares of our common stock pledged by Robert Spigno as security
for a loan made by Laurus to us in April 2001 in the original principal
amount of $300,000.
In November 2002, we issued to AJW Partners, LLC, AJW Qualified
Partners, LLC (f/k/a Pegasus Capital Partners, LLC) and AJW Offshore, Ltd.
(f/k/a AJW/New Millennium Offshore, Ltd.) an aggregate of $200,000 of our
12% Convertible Debentures due November 27, 2003, or the November 2002
offering, which were accompanied by warrants to purchase up to an aggregate
of 1,000,000 shares of common stock. The debentures are immediately
convertible into shares of common stock at an initial per share price equal
to the lesser of $.01 and 50% of the average of the lowest three intraday
trading prices during the 20 trading days immediately preceding a
conversion. The warrants are immediately exercisable for shares of common
stock at an initial per share price equal to $.005. Upon filing of a
registration statement covering the resale of shares underlying the
convertible debentures and warrants issued in the November 2002 offering
and covering the resale of shares underlying the convertible debentures and
warrants that the debenture investors are committed to purchasing, the
debenture investors in the November 2002 offering are committed to
purchasing additional convertible debentures in the amount of $150,000 and
related warrants to purchase up to an aggregate of 750,000 shares of common
stock. Upon declaration by the Securities and Exchange Commission of the
registration statement covering the resale of shares underlying the
convertible debentures and warrants issued in the November 2002 offering
and covering the resale of shares underlying the convertible debentures and
warrants that the debenture investors are committed to purchasing, the
debenture investors in the November 2002 offering are committed to
purchasing additional convertible debentures in the amount of $150,000 and
related warrants to purchase up to an aggregate of 750,000 shares of common
stock. The full amount of the debentures issued in the November 2002
offering remains outstanding.
In November 2002, we issued 636,886 shares of common stock to
Lawrence Muirhead to reimburse him for 636,886 shares pledged by him as
security for a loan made by Laurus Master Fund to us in April 2001 in the
original principal amount of $300,000, which pledged shares were
transferred by Laurus into its name in connection with a default on that
loan.
In November 2002, we issued 2,630,742 shares of common stock to
Robert Spigno to reimburse him for 2,630,742 shares pledged by him as
security for a loan made by Laurus Master Fund to us in April 2001 in the
original principal amount of $300,000, which pledged shares were
transferred by Laurus into its name in connection with a default on that
loan.
In November 2002, we issued 1,458,059 shares of common stock to
Patricia Spigno to reimburse her for 1,458,059 shares pledged by her as
security for a loan made by Laurus Master Fund to us in April 2001 in the
original principal amount of $300,000, which pledged shares were
transferred by Laurus into its name in connection with a default on that
loan.
<page>24
On December 12, 2002, we issued 250,000 shares of common stock
valued at $1,250 to Melissa McGough as bonus compensation.
In January 2003, we issued 2,361,814 shares of common stock to
Robert Spigno to reimburse him for 2,361,814 shares pledged by him as
security for a loan made by Mercator Momentum Fund to us in February 2002
in the original principal amount of $340,000, which pledged shares were
transferred by Mercator into its name in connection with a default on that
loan.
In January 2003, we issued 47,521 shares of common stock to
Lawrence Muirhead to reimburse him for 47,521 shares pledged by him as
security for a loan made by Laurus Master Fund to us in April 2001 in the
original principal amount of $300,000, which pledged shares were
transferred by Laurus into its name in connection with a default on that
loan.
On January 6, 2003, we extended to December 31, 2004, the
expiration date of an option granted to Mr. Muirhead on November 22, 1999
that initially expired December 31, 2002, to purchase up to 2,000,000
shares of common stock at an exercise price of $.50 per share, which was
the closing price of a share of our common stock on the date of grant. This
option vests upon the achievement of certain specified performance
criteria.
On January 6, 2003, we extended to December 31, 2004, the
expiration date of an option granted to Mr. Spigno on November 22, 1999
that initially expired December 31, 2002, to purchase up to 500,000 shares
of common stock at an exercise price of $.15 per share, which was 50% of
the closing price of a share of our common stock on the date of grant. This
option vested immediately.
On January 6, 2003, we extended to December 31, 2004, the
expiration date of an option granted to Ms. McGough on September 1, 1999
that initially expired December 31, 2002, to purchase up to 100,000 shares
of common stock at an exercise price of $.38 per share, which was 50% of
the closing price of a share of our common stock on the date of grant. This
option vested immediately.
We are or have been a party to various employment, consulting and
compensation arrangements with related parties, as more particularly
described above under the headings "Management-Compensation of Executive
Officers" and "Management-Compensation of Directors."
THE PRINCIPAL AND SELLING SECURITY HOLDERS
SECTION IS REPLACED WITH THE FOLLOWING:
- ------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
As of January 6, 2003, a total of 97,110,266 shares of our common stock
were outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock both before and
immediately after the offering by:
o each person known by us to own beneficially more than five percent,
in the aggregate, of the outstanding shares of our common stock as
of the date of the table;
o each selling security holder;
o each of our directors;
<page>25
o each executive officer named in the Summary Compensation Table
contained elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally
includes voting or investment power with respect to securities. Except as
indicated in the footnotes to the table, we believe each holder possesses
sole voting and investment power with respect to all of the shares of
common stock owned by that holder, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a
holder and the percentage ownership of that holder, shares of common stock
subject to options or warrants or underlying notes or preferred stock held
by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are
deemed outstanding. Those shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other person or
group.
All of the shares of common stock being offered under this
prospectus are issuable upon conversion of debentures or upon exercise of
warrants that were acquired by the selling security holders from us in
connection with private placements that we made effective as of March 29,
2002, May 10, 2002 and June 17, 2002. In the private placement effective
March 29, 2002, we issued $300,000 in principal amount of secured
convertible debentures due March 29, 2003 to four accredited investors, or
the debenture investors, in exchange for gross proceeds of $300,000 in
cash. In connection with that private placement, we also issued warrants to
purchase up to an aggregate of 1,500,000 shares of our common stock to the
debenture investors. In the private placement effective May 10, 2002, we
issued $150,000 in principal amount of secured convertible debentures due
May 10, 2003 to the debenture investors in exchange for gross proceeds of
$150,000 in cash. In connection with that private placement, we also issued
warrants to purchase up to an aggregate of 750,000 shares of our common
stock to the debenture investors. In the private placement effective June
17, 2002, we issued $300,000 in principal amount of secured convertible
debentures due June 17, 2003 to the debenture investors in exchange for
gross proceeds of $300,000 in cash. In connection with that private
placement, we also issued warrants to purchase up to an aggregate of
1,500,000 shares of our common stock to the debenture investors.
The secured convertible debentures bear interest at an initial rate
of 12% per year. The initial conversion price of the debentures is equal to
the lesser of (i) 50% of the average of the three lowest intraday trading
prices of a share of our common stock for the twenty trading days
immediately preceding a conversion date, and (ii) $.06. The conversion
price also is subject to customary anti-dilution adjustments in connection
with mergers, acquisitions, stock splits, dividends and the like.
We agreed to register for resale a total of 200% of the shares of
common stock that may be issuable upon conversion of the convertible
debentures and related warrants. The shares of common stock being offered
under this prospectus include shares of common stock issuable upon
conversion of the secured convertible debentures and upon exercise of the
related warrants without regard to the exercise limitations described
below.
The terms of the secured convertible debentures and the warrants
prohibit conversion of the secured convertible debentures or exercise of
the warrants to the extent that conversion of the debentures would result
in the debenture investor, together with its affiliates, beneficially
owning in excess of 4.9% of our outstanding shares of common stock, and to
the extent that exercise of the warrants would result in the debenture
investor, together with its affiliates, beneficially owning in excess of
4.9% of our outstanding shares of common stock. A debenture investor may
waive the 4.9% limitation upon 60 days' prior written notice to us. Also,
these limitations do not preclude a debenture investor from converting or
<page>26
exercising a secured convertible debenture or warrant and selling shares
underlying the secured convertible debenture or warrant in stages over time
where each stage does not cause the investor and its affiliates to
beneficially own shares in excess of the limitation amounts. Despite the
limitations contained in the secured convertible debentures and warrants,
the number of shares shown in the table as beneficially owned by each
debenture investor prior to this offering is in excess of 4.9% of the
shares of our common stock outstanding based on the date of the table. The
number of shares being offered by each debenture investor under this
prospectus is in excess of the amount of shares issuable to that investor
without such investor's waiver of the conversion and exercise limitations
discussed above.
We have agreed to pay expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed
with some of the selling security holders to prepare and file all
amendments and supplements to the registration statement of which this
prospectus is a part as may be necessary under the rules and regulations of
the Securities Act of 1933 to keep it effective until the earlier of:
o the date that all shares of common stock offered under this
prospectus may be resold by those holders in a public transaction
without volume limitations or other material restrictions without
registration under the Securities Act, including without
limitation, under Rule 144 under the Securities Act; and
o the date that all shares of common stock offered by those holders
under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares
of common stock offered by the selling security holders.
The shares of common stock being offered under this prospectus may
be offered for sale from time to time during the period the registration
statement of which this prospectus is a part remains effective, by or for
the accounts of the selling security holders listed in the table below.
<page>27
<Table>
Name and Address of Title of Shares Beneficially Owned Shares Shares Beneficially
of Beneficial Owner (1)(2) Class Prior to the Offering Being Offered Owned After the Offering(3)
Number Number % of Class
__________________________ ________ _________________________ _____________ __________________________
Robert A. Spigno.......... Common 11,436,210(4) -- 11,436,210 11.04%
Class A Preferred 450,020(5) -- 450,020 100%
Class B Preferred 500,000(6) -- 500,000 100%
Patricia A. Spigno........ Common 2,423,863(7) -- 2,423,863 2.48%
Lawrence Muirhead......... Common 971,393 -- 971,393 1.00%
Melissa McGough........... Common 454,138(8) -- 454,138 *
AJW Partners, LLC Common 9,868,665(9) 9,868,665(9) -- --
New Millennium Capital....
Partners II, LLC Common 9,868,665(9) 9,868,665(9) -- --
AJW Offshore, Ltd......... Common 11,211,846(9) 11,211,846(9) -- --
AJW Qualified Partners,
LLC....................... Common 6,528,251(9) 6,528,251(9) -- --
All directors and executive
officers
as a group (4 persons) Common 15,285,604(10) -- 15,285,604 14.68%
Class A Preferred 450,020(5) -- 450,020 100%
Class B Preferred 500,000(6) -- 500,000 100%
</table>
_______________
* Less than 1.00%
(1) The address of each director and executive officer named in this
table is c/o ConectiSys Corporation, 24730 Avenue Tibbitts, Suite
130, Valencia, California 91355. Mr. Spigno and Mr. Muirhead are
directors and executive officers of ConectiSys. Ms. McGough is a
director of ConectiSys. Ms. Spigno is an executive officer of
ConectiSys.
(2) The address of each of AJW Partners, LLC, New Millennium Capital
Partners II, LLC, AJW Qualified Partners, LLC and AJW Offshore,
Ltd. is 1044 Northern Boulevard, Suite 302, Roslyn, New York 11576.
AJW Offshore, Ltd. was formerly known as AJW/New Millennium
Offshore, Ltd. AJW Qualified Partners, LLC was formerly known as
Pegasus Capital Partners, LLC.
(3) Assumes all shares of class being offered are sold.
(4) Includes 1,443,654 shares underlying options and 5,000,000 shares
issuable upon conversion of Class B Preferred Stock. Mr. Spigno
holds an option to purchase Class B Preferred Stock.
(5) Includes an option to purchase up to 250,000 shares of Class A
Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(7) Includes 500,000 shares underlying options.
(8) Includes 100,000 shares underlying options.
(9) The number of shares set forth in the table for the selling
security holders represents an estimate of the number of shares of
common stock to be offered by the selling security holders. The
actual number of shares of common stock issuable upon conversion of
the debentures and exercise of the related warrants is
indeterminate, is subject to adjustment and could be materially
less or more than such estimated number depending on factors which
cannot be predicted by us at this time including, among other
factors, the future market price of the common stock. The actual
number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is
<page>28
a part, includes such additional number of shares of common stock
as may be issued or issuable upon conversion of the debentures and
exercise of the related warrants by reason of any stock split,
stock dividend or similar transaction involving the common stock,
in accordance with Rule 416 under the Securities Act of 1933.
Under the terms of the debentures, if the debentures had actually
been converted on January 6, 2003, the conversion price would have
been $.005. Under the terms of the warrants, if the warrants had
actually been converted on January 6, 2003, the exercise price
would have been $.005.
(10) Includes 7,043,654 shares underlying options.
THE FIRST PARAGRAPH OF THE DESCRIPTION OF CAPITAL
STOCK SECTION IS REPLACED WITH THE FOLLOWING:
- -------------------------------------------------
Our authorized capital stock consists of 250,000,000 shares of
common stock, no par value per share, and 50,000,000 shares of preferred
stock, $1.00 par value per share. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock, or Class A Preferred, 1,000,000 shares have been designated as Class
B Preferred Stock, or Class B Preferred, and the remaining 48,000,000
shares are undesignated. As of January 6, 2003, there were 97,110,266
shares of common stock outstanding held by approximately 780 shareholders
of record and 200,020 shares of Class A Preferred outstanding held by one
holder of record and no shares of Class B Preferred outstanding. The
following is a summary description of our capital stock.
THE EXPERTS SECTION IS REPLACED WITH THE FOLLOWING:
- ---------------------------------------------------
The consolidated financial statements of ConectiSys as of and for
the years ended September 30, 2002 and 2001 included in this prospectus
have been audited by Hurley & Company, independent certified public
accountants, to the extent and for the periods set forth in their report,
appearing elsewhere in this prospectus and are incorporated in this
prospectus in reliance upon the report given upon the authority of Hurley &
Company as experts in auditing and accounting.
<page>29
CONECTISYS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements As Of And For The Years Ended
September 30, 2002 and 2001
Report of Independent Certified Public Accountants.......................F-1-2
Consolidated Balance Sheet for the Year Ended September 30, 2002.........F-3-4
Consolidated Statements of Operations for the Years
Ended September 30, 2002 and 2001...................................F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended September 30, 2002 and 2001.....................F-6-12
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2002 and 2001.........................................F-13-15
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2002 and 2001.........................................F-16-52
INDEPENDENT AUDITORS' REPORT
Board of Directors
Conectisys Corporation and Subsidiaries
Valencia, California
We have audited the accompanying consolidated balance sheet of Conectisys
Corporation and Subsidiaries (a development stage company) (the "Company")
as of September 30, 2002, and the related consolidated statements of
operations, changes in shareholders' equity (deficit), and cash flows for
the years ended September 30, 2002 and 2001, and the cumulative period
from December 1, 1990 (inception of development stage) through September
30, 2002, except that we did not audit these financial statements for the
period December 1, 1990 (inception of development stage) through November
30, 1997; these financial statements were audited by other auditors, whose
reports dated March 6, 1998 (for the period December 1, 1994 through
November 30, 1997) and January 9, 1995 (for the period December 1, 1990
(inception of development stage) through November 30, 1994), respectively,
expressed a going concern uncertainty. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Conectisys Corporation and Subsidiaries as of September 30,
2002, and the results of their operations and their cash flows for the
years ended September 30, 2002 and 2001, and the cumulative period from
December 1, 1990 (inception of development stage) through September 30,
2002, in conformity with accounting principles generally accepted in the
United States of America.
<page>F-1
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a deficiency in working capital at
September 30, 2002. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Hurley & Company
Granada Hills, California
January 7, 2003
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 55,101
Debt issuance costs - current, net of
accumulated amortization of $131,172 89,103
-----------
Total current assets 144,204
Property and equipment, net of
accumulated depreciation of $280,373 51,339
Other assets:
License rights and technology, net of
accumulated amortization of $421,478 -
-----------
Total assets $ 195,543
===========
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET (continued)
September 30, 2002
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 188,898
Accrued compensation 927,850
Due to officers 130,484
Accrued interest 206,476
Other current liabilities 11,928
Notes payable and
current portion of long-term debt 755,149
------------
Total current liabilities 2,220,785
Long-term debt, net of current portion 89,730
Commitments and contingencies -
SHAREHOLDERS' DEFICIT:
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 200,020
shares issued and outstanding 200,020
Convertible preferred stock - Class B,
no par value; 1,000,000 shares
authorized, -0- shares issued and outstanding -
Common stock, no par value; 250,000,000
shares authorized, 64,311,823
shares issued and outstanding 18,435,238
Additional paid-in capital:
Convertible preferred stock - Class B, no
par value; 1,000,000 stock options exercisable 100,000
Common stock, no par value;
8,807,154 stock options and warrants exercisable 1,343,695
Beneficial conversion option, debt instruments 724,238
Deficit accumulated during the development stage (22,918,163)
------------
Total shareholders' deficit (2,114,972)
------------
Total liabilities and
shareholders' deficit $ 195,543
============
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2002 and 2001,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2002
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2002 2001 Sept. 30, 2002
----------- ----------- --------------
Net revenues $ - $ - $ 517,460
Cost of sales 73,667 37,930 641,388
----------- ----------- --------------
Gross loss (73,667) (37,930) (123,928)
Operating expenses:
General and administrative 1,808,657 1,779,420 17,169,130
Bad debt expense - - 1,680,522
----------- ----------- --------------
Loss from operations (1,882,324) (1,817,350) (18,973,580)
Other income (expense):
Settled damages - - 25,000
Other income - - 12,072
Interest income 2 3 102,923
Interest expense (464,410) (337,220) (1,769,475)
Write-off of
intangible assets - - (1,299,861)
Minority interest - - 62,500
----------- ----------- --------------
Net loss $(2,346,732) $(2,154,567) $ (21,840,421)
=========== =========== ==============
Weighted average number
of shares outstanding -
basic and diluted 39,976,138 27,201,207
Net loss per share -
basic and diluted $ (.06) $ (.08)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-5
CONECTISYS CORORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For
the Cumulative Period December 1, 1990 (Inception) Through September 30,
2002
<table>
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
December 1, 1990
(re-entry
development stage) - $ - 10,609 $ 1,042,140 $ - $ - $ (1,042,140)$ -
Shares issued in exchange for:
Cash, May 31, 1993 - - 1,000 1,000 - - - 1,000
Capital contribution,
May 31, 1993 - - 2,000 515 - - - 515
Services, March 26, 1993 - - 2,000 500 - - - 500
Services, March 26, 1993 - - 1,200 600 - - - 600
Net loss for the year - - - - - - (5,459) (5,459)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1993 - - 16,809 1,044,755 - - (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1, 1994 - - 2,400 3,000 - - - 3,000
Cash, September 1, 1994 - - 17,771 23,655 - - - 23,655
Services, September 15, 1994 - - 8,700 11,614 - - - 11,614
Cash, September 26, 1994 - - 3,000 15,000 - - - 15,000
Cash, October 6, 1994 16,345 16,345 - - - - - 16,345
Cash, September and October,
1994 - - 1,320 33,000 - - - 33,000
Net loss for the year - - - - - - (32,544) (32,544)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1994 16,345 16,345 50,000 1,131,024 - - (1,080,143) 67,226
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 16,345 129,569 5,031,834 - - (3,374,010) 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 20,500 138,786 6,457,221 - - (5,612,943) 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 20,500 4,677,268 8,349,580 - - (8,352,211) 17,869
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 80,500 12,662,212 12,437,747 - - (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 - (14,604,724) (1,935,002)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 2,799,579 1,171,638 - - - 1,171,638
Cash, October, 1999 through
September, 2000, with subscription
prices ranging from $0.25 to
$0.66 per share - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 1,113,610 - 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May, 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange
for officer debt 20,000 20,000 2,056,346 897,707 (407,735) - - 509,972
Issuance of 500,000 consultant
stock options, September, 2000,
with floating exercise prices
set at 15% below current market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) ( 869,868)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 15,450 - 15,450
Exercise of 400,000 common
stock options, January, 2001,
at a strike price of $0.085 per
share, in exchange for debt - - 400,000 86,000 (52,000) - - 34,000
Issuance of 1,000,000 common
stock warrants, April, 2001,
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a strike price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 - (20,571,431) (1,489,032)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2002
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 179,916
Debt and accrued liabilities,
October, 2001 through September,
2002, with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
strike price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 71,500
Issuance of 3,750,000 warrants,
April, 2002 through June, 2002,
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 $ 200,020 64,311,823 $18,435,238 $2,167,933 $ - $(22,918,163)$(2,114,972)
========= ========== ========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2002 and 2001,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2002
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2002 2001 Sept. 30, 2002
----------- ------------ -------------
Cash flows from operating
activities:
Net loss $(2,346,732) $ (2,154,567) $(21,840,421)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Stock issued for services 179,916 687,790 7,386,773
Stock issued for interest - - 535,591
Provision for bad debt
write-offs - - 1,422,401
Minority interest - - (62,500)
Settled damages - - (25,000)
Write-off of intangible
assets - - 1,299,861
Depreciation and
amortization of property 27,309 32,077 1,669,974
Amortization of debt issuance
costs and note discount 377,512 265,030 642,542
Changes in:
Accounts receivable - - (4,201)
Accrued interest
receivable - - (95,700)
Prepaid exp. and deposits 48,800 158,546 182,346
Accounts payable 308,251 65,961 620,248
Accrued compensation 394,459 402,823 2,034,022
Due to officers (62,293) 26,209 673,792
Accrued interest and
other current liabilities 61,078 24,199 456,843
----------- ------------ -------------
Total adjustments 1,335,032 1,662,635 16,736,992
----------- ------------ -------------
Net cash used in
operating activities (1,011,700) (491,932) (5,103,429)
----------- ------------ -------------
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2002 and 2001,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2002
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2002 2001 Sept. 30, 2002
----------- ------------ -------------
Cash flows from investing
activities:
Issuance of
notes receivable $ - $ - $ (1,322,500)
Costs of license rights
and technology - - (94,057)
Purchase of equipment (6,687) (10,734) (198,530)
----------- ----------- -------------
Net cash used in
investing activities (6,687) (10,734) (1,615,087)
----------- ----------- -------------
Cash flows from financing
activities:
Common stock issuance 200,000 78,787 3,232,172
Stock warrant issuance 100,087 77,228 177,315
Preferred stock issuance - - 16,345
Proceeds from debt, other 1,244,790 386,399 3,483,880
Debt issuance costs from
debt, other (187,500) (32,775) (220,275)
Proceeds from debt, related - - 206,544
Proceeds from stock purchase - - 281,250
Payments on debt, other (290,000) (50,000) (386,407)
Payments on debt, related - - (53,172)
Decrease in stock
subscription receivable - 15,450 35,450
Contributed capital - - 515
----------- ----------- -------------
Net cash provided by
financing activities 1,067,377 475,089 6,773,617
----------- ----------- -------------
Net increase (decrease) in
cash and cash equivalents 48,990 (27,577) 55,101
Cash and cash equivalents
at beginning of period 6,111 33,688 -
------------ ----------- -------------
Cash and cash equivalents
at end of period $ 55,101 $ 6,111 $ 55,101
============ =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2002 and 2001,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2002
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2002 2001 Sept. 30, 2002
----------- ----------- -------------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 127,868 $ 33,864 $ 337,669
=========== =========== =============
Cash paid for income taxes$ 800 $ 800 $ 4,850
=========== =========== =============
Non-cash investing and financing activities:
Common stock issued
in exchange for:
Note receivable $ - $ - $ 281,250
Prepaid expenses $ - $ 48,800 $ 182,346
Property and equipment $ - $ - $ 130,931
Licenses and technology $ - $ - $ 2,191,478
Acquisition of remaining
minority interest in
subsidiary $ - $ - $ 59,247
Repayment of debt and
interest $ 530,876 $ 472,321 $ 4,356,056
Services and interest $ - $ - $ 4,949,192
Preferred stock issued
in exchange for:
Services $ - $ - $ 60,000
Repayment of debt $ 60,000 $ - $ 119,520
Preferred stock options
issued in exchange for:
Repayment of debt $ - $ - $ 100,000
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company")
was incorporated under the laws of Colorado on February 3, 1986, to analyze
and invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies
and products for remote reading of electronic energy meters located in
residential structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the
State of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc.,
was formed, which has no net assets and which has not, as yet, commenced
operations.
Basis of presentation and going concern uncertainty
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
eEnergyServices.com, Inc., and United Telemetry Company, Inc. All material
intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements. Certain prior period
balances have been reclassified to conform to the current year's
presentation.
The Company returned to the development stage in accordance with SFAS No. 7
on December 1, 1990 and during the fiscal year ended November 30, 1995.
The Company has completed two mergers and is in the process of developing
its technology and product lines.
As of September 30, 2002, the Company had a deficiency in working capital
of approximately $2,075,000, and had incurred continual net losses since
its return to the development stage in fiscal 1996 of over $19,000,000,
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Basis of presentation and going concern uncertainty (continued)
which raise substantial doubt about the Company's ability to continue as a
going concern.
Management's plans for correcting these deficiencies include the future
sales and licensing of the Company's products and technologies the raising
of capital through the issuance of common stock and from continued officer
advances, which will help provide the Company with the liquidity necessary
to retire its outstanding debt and meet operating expenses. Subsequent to
the end of fiscal year 2002, the Company received $200,000 in funding from
an accredited investor group, through the issuance of 12% convertible debt,
along with 1,000,000 detachable stock warrants (see Note 15(b)). This same
investor group had previously advanced the Company an aggregate amount of
$750,000 through 3 similar funding tranches occurring in April, May, and
June of 2002. Over the longer term, the Company plans to achieve
profitability through the operations of its subsidiaries. The accompanying
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of the recorded asset amounts or
the amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts.
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Fair value of financial instruments (continued)
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
instrument. Changes in assumptions could significantly affect the
estimates.
Since the fair value is estimated at September 30, 2002, the amounts that
will actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents
is assumed to be the fair value because of the liquidity of these
instruments. Accounts payable, accrued compensation, due to officer,
accrued interest, other current liabilities, and notes payable approximate
fair value because of the short maturity of these instruments. Also,
market rates of interest apply on all officer advances and short-term
promissory notes. Long-term debt is recorded at face value because the
principal amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
Research and development costs
The Company has been engaged in researching, engineering, and developing
its H-Net(TM) technologies since August 1995, and did not generate
any revenue during the past fiscal year. The Company hopes to complete
large-scale cost reduction runs for the production and subsequent sale of
the H -Net TM system in 2003.
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly
liquid debt instruments with original maturities of three months or less.
All funds on deposit are with one financial institution.
Licensing agreements
The costs of acquiring license rights are capitalized and amortized over
the shorter of the estimated useful life of the license or the term of the
license agreement. The licenses are being amortized over a period of five
years. During the year ended November 30, 1998, the Company acquired
additional license rights in the amount of $421,478 from TechniLink.
Although the license remains viable, the Company currently lacks the
resources to develop and market it. Accordingly, during the ten month
period ended September 30, 1999, the Company accelerated amortization on
this asset by writing it down to its net realizable value of $40,000,
incurring a charge of $283,133. The balance was fully amortized at
September 30, 2000.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected
useful lives of the assets, which are generally three years for computer
software, five years for vehicles and office equipment, and seven years for
furniture and fixtures.
Technology
Deferred technology costs include capitalized product development and
product improvement costs incurred after achieving technological
feasibility and are amortized over a period of five years. At September
30, 2002, no deferred technology costs were recognized.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
- -based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from non-employees in exchange for
equity instruments. The Company adopted this accounting standard on
January 1, 1996. SFAS No. 123 also encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation. The Company has chosen to account for stock-based
compensation utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the
stock. Also, in accordance with SFAS No. 123, the Company has provided
footnote disclosures with respect to stock-based employee compensation.
The cost of stock-based compensation is measured at the grant date on the
value of the award, and this cost is then recognized as compensation
expense over the service period. The value of the stock-based award is
determined using a pricing model whereby compensation cost is the excess of
the fair market value of the stock as determined by the model at the grant
date or other measurement date over the amount an employee must pay to
acquire the stock.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for
goods or services are valued at the cost of the goods or services received
or at the market value of the shares issued, depending on the ability to
estimate the value of the goods or services received.
Income taxes
The Company files a consolidated income tax return. The Company has
adopted Statement of Financial Accounting Standards ("SFAS") No. 109, which
requires the Company to recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis
of assets using the enacted rates in effect in the years in which the
differences are expected to reverse. The Company has recognized a
valuation allowance covering 100% of the net deferred tax assets (primarily
tax benefits from net operating loss carryforwards), because it is more
likely than not that the tax benefits attributable to the deferred tax
assets will not be realized in the future.
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number
of common and common equivalent shares outstanding for the periods
presented. Common equivalent shares representing the common shares that
would be issued on exercise of convertible securities and outstanding stock
options and warrants reduced by the number of shares which could be
purchased from the related exercise proceeds are not included since their
effect would be anti-dilutive.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Recent accounting pronouncements
The Financial Accounting Standards Board has established the following new
pronouncements: SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," issued in
April 2002 and effective for financial statements issued after May 25,
2002, which effectively amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency involving sale-leaseback transactions and also
gives clarity to other existing authoritative pronouncements, SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," issued
in June 2002 and effective for exit or disposal activities after December
15, 2002, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issue
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring, SFAS No. 147,
"Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9," issued in October
2002 and applicable for acquisitions on or after October 1, 2002, which
generally removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions
be accounted for in accordance with FASB Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, and amends
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long
- -Lived Assets, to include in its scope certain long-term customer
- -relationship intangible assets of financial institutions, and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure
- - an amendment of FASB Statement No. 123," issued in December 2002 and
effective for fiscal years ending after December 15, 2002, which provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
Adoption of the above accounting pronouncements is not expected to have a
material effect on the Company's financial statements.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 2. RELATED PARTY TRANSACTIONS
The Company previously leased office space in Agua Dulce, California from
S.W. Carver Corporation, a company owned by a major shareholder of the
Company. Around September 1, 2000, the lease was terminated due to the
sale of the building. At that time the Company moved certain property and
equipment to its Valencia locations.
The officers of the Company have continually advanced funds to the Company.
These advances have generally been in the form of revolving short-term
promissory notes at an annual interest rate of 18% (see Note 7 below).
NOTE 3. PREPAID EXPENSES AND DEPOSITS
During the year ended September 30, 2000, the Company issued 462,487 shares
of its common stock as retainers for consulting services ($128,611) and
accounting fees ($4,935). In addition, the Company recorded the unearned
portion of an engineering contract ($25,000) as a prepaid asset, bringing
the total prepaid expense balance at September 30, 2000 to $158,546. All
these prepaid assets were expensed during the year ended September 30,
2001. Another 386,584 shares of common stock (valued at $43,800) were
issued to a consultant as a retainer at September 30, 2001, for cash
payments that were subsequently made by the consultant to other vendors in
October 2001. An attorney was paid a retainer in September 2001 for
services not yet rendered, bringing the total prepaid expense balance at
September 30, 2001 to $48,800. These costs were fully expensed during the
year ended September 30, 2002.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 consisted of the following:
Office equipment $ 279,741
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 331,712
Accumulated depreciation (280,373)
-----------
Net book value $ 51,339
===========
NOTE 5. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2002 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
NOTE 6. DEBT ISSUANCE COSTS
In April 2001, the Company received proceeds of $300,000 from an investor
in return for a six-month 8% convertible note and 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. Debt
issuance costs on this transaction amounted to $32,775, and consisted of
$24,000 in finder's fees, $8,000 in legal fees, and $775 in other costs.
These debt issuance costs were fully amortized at September 30, 2001.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 6. DEBT ISSUANCE COSTS (continued)
In February 2002, the Company received $340,000 in short-term financing
from an investment group through the issuance of a promissory note maturing
on May 15, 2002 and accruing interest at an annual rate of 18%. Included
in the loan was $40,000 in fees, consisting specifically of a $30,000
finder's fee and a $10,000 legal fee. These loan fees were fully amortized
at September 30, 2002.
In March through June 2002, the Company received $750,000 from an
accredited investor group in exchange for 12% convertible debt, along with
3,750,000 common stock warrants, exercisable over a four-year period at the
lesser of $0.045 per share and 50% of the average of the lowest three
intraday trading prices of a share of common stock during the 20 trading
days immediately preceding conversion. Debt issuance costs associated with
these loans amounted to $147,500, of which $90,000 represented finder's
fees and $57,500 represented legal costs. Amortization of these fees over
the pro-rata portion of the one-year term of the loans amounted to $58,397
through September 30, 2002, leaving an unamortized balance of $89,103 at
September 30, 2002. Total amortization of all debt issuance costs
during the year ended September 30, 2002 amounted to $98,397.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 7. DUE TO OFFICERS
At September 30, 2000, the Company's CEO had made cumulative advances to
the Company of $75,000. On October 1, 2000, these advances were rolled
into a revolving promissory note, due on demand, at an annual interest rate
of 18%. During the year ended September 30, 2001, additional advances were
made in the amount of $20,000 and note repayments totaled $50,000. Accrued
interest was determined to be $11,880, bringing the loan balance at
September 30, 2001 to $56,880. A new promissory note agreement for this
amount was drawn up at the close of business on September 30, 2001,
expiring September 1, 2002. During the year ended September 30, 2002, cash
advances of $31,500 were made. Additionally, the loan account was
increased by $120,875, representing the value of 2,361,814 restricted
shares of the Company's common stock held by the CEO, which were used as
collateral and transferred to a note holder in June of 2002 to partially
cover a $300,000 debt, and by $16,202, representing the value of 794,857
restricted shares of the Company's common stock held by the CEO, which were
pledged to and sold by a convertible note holder on a Company obligation in
and accrued interest amounted to $6,913 during the year ended default.
Repayments of debt by the Company amounted to $144,806 September 30, 2002,
resulting in a loan balance due the CEO at September 30, 2002 of $87,564.
The loan balance at September 30, 2002 is currently due on demand and
continues to accrue interest at the rate of 18% per year.
The Company's Secretary/Treasurer advanced the Company approximately
$61,945 during the year ended September 30, 2001, under a separate
revolving promissory note agreement effective October 1, 2000. The note is
a demand note, which accrues interest at an annual rate of 18%. Total
repayments of the note amounted to $40,681. Accrued interest was $4,610
during the year ended September 30, 2001, bringing the loan balance at
year-end to $25,874. A new promissory note agreement for this amount was
drawn up at the close of business on September 30, 2001, expiring September
1, 2002. The Secretary/Treasurer also borrowed on a personal credit card
for the Company's behalf in the amount of $18,455, bringing the total
obligation due the Secretary/Treasurer at September 30, 2001 to $44,329.
During the year ended September 30, 2002, the personal credit card balance
was virtually paid-off. Additional loan advances were $19,500, loan
repayments were $39,500, and accrued interest was $2,269 during the year
ended
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 7. DUE TO OFFICERS (continued)
September 30, 2002, bringing the aggregate loan balance due the
Secretary/Treasurer at September 30, 2002 to $8,143. The loan balance at
September 30, 2002 is currently due on demand and continues to accrue
interest at the rate of 18% per year.
During the period May through September 2002, the Company's Chief Technical
Officer advanced the Company $32,946, corresponding to 684,407 restricted
shares of the Company's common stock held by the officer, which were
pledged to and sold by a convertible note holder on a Company obligation in
default. Accrued interest at the annual rate of 18% was $1,831 through the
end of the fiscal year, bringing the total loan amount to $34,777 at
September 30, 2002. The loan balance at September 30, 2002 is currently
due on demand and continues to accrue interest at the rate of 18% per year.
The aggregate amount due officers at September 30, 2002 was $130,484 and
interest expense on the officer loans amounted to $11,013 and $16,490 for
the years ended September 30, 2002 and 2001, respectively.
NOTE 8. NOTES PAYABLE
Notes payable at September 30, 2002 consisted of the following:
Registered Convertible Debentures
Convertible Debenture #1
Note payable to AJW Partners, LLC $54,630
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $1,652 and principal
on Convertible Debenture convertible
into approximately 18,761,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,652 56,282
--------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
Note payable to New Millennium Capital $54,630
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $1,652 and principal
on Convertible Debenture convertible
into approximately 18,761,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,652 56,282
--------
Note payable to AJW/New Millennium 61,960
Offshore, Ltd.(Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $1,875 and principal
on Convertible Debenture convertible
into approximately 21,278,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,875 63,835
--------
Note payable to Pegasus Capital Partners, LLC 35,650
Offshore, Ltd. Ltd. (Convertible
Debenture) due on March 29, 2003
at an annual interest rate of 12%
Accrued interest of $1,078 and principal
on Convertible Debenture convertible
into approximately 12,243,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,078 36,728
--------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
Convertible Debenture #2
Note payable to AJW Partners, LLC $40,000
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12%
Accrued interest of $1,210 and principal
on Convertible Debenture convertible
into approximately 13,737,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,210 41,210
--------
Note payable to New Millennium Capital 40,000
Partners II, LLC(Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12%
Accrued interest of $1,210 and principal
on Convertible Debenture convertible
into approximately 13,737,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,210 41,210
--------
Note payable to AJW/New Millennium 45,000
Offshore, Ltd.(Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12%
Accrued interest of $1,361 and principal
on Convertible Debenture convertible
into approximately 15,454,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,361 46,361
--------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
Note payable to Pegasus Capital Partners, LLC $25,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on May 10, 2003
at an annual interest rate of 12%
Accrued interest of $756 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.003 at September 30, 2002 756 25,756
-------
Convertible Debenture #3
Note payable to AJW Partners, LLC 80,000
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12%
Accrued interest of $2,420 and principal
on Convertible Debenture convertible
into approximately 27,473,000
shares of common stock at the price
of $0.003 at September 30, 2002 2,420 82,420
-------
Note payable to New Millennium Capital 80,000
Partners II, LLC(Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12%
Accrued interest of $2,420 and principal
on Convertible Debenture convertible
into approximately 27,473,000
shares of common stock at the price
of $0.003 at September 30, 2002 2,420 82,420
--------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium $90,000
Offshore, Ltd.(Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12%
Accrued interest of $2,722 and principal
on Convertible Debenture convertible
into approximately 30,907,000
shares of common stock at the price
of $0.003 at September 30, 2002 2,722 92,722
--------
Note payable to Pegasus Capital Partners, LLC 50,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on June 17, 2003
at an annual interest rate of 12%
Accrued interest of $1,512 and principal
on Convertible Debenture convertible
into approximately 17,171,000
shares of common stock at the price
of $0.003 at September 30, 2002 1,512 51,512
-------- ------
Subtotal of Registered Convertible Debentures 676,738
Less note discount (401,652)
---------
Net carrying value of Registered Convertible Debentures 275,086
Note payable to Devon Investment Advisors,
unsecured, due on demand, interest payable
at an annual rate of 10%. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 188,126
Convertible note payable to Laurus Master Fund, Ltd.,
secured by 3,293,944 shares of common stock
beneficially owned by officers, with interest
payable at an annual rate of 8%, conversion
premium of 25% based on current market price of
the Company's common stock (as defined), initially
due October 12, 2001 and extended to
December 1, 2001. Currently in default. 129,214
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
Convertible note payable to Rowell A. McHatten, Jr.,
unsecured, with interest payable at an annual rate
of 14%, convertible into restricted common stock of
the Company at $0.06 per share, due April 24, 2003. 10,629
---------
Total notes payable 844,879
Current portion (755,149)
--------
Long-term portion $ 89,730
=========
On April 12, 2001, the Company received $300,000 in proceeds from Laurus
Master Fund, Ltd. ("Laurus") and issued a $300,000 principal value 8%
convertible note due on October 12, 2001, along with 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. $77,228
of the proceeds was allocated to the cost of the warrants, with the
remaining $222,772 allocated to the cost of the debt instrument, based on
the relative fair market values of the note and the warrants at the date of
issuance.
A convertible note discount of $77,228 was also recognized, which was
effectively fully amortized at September 30, 2002 as interest expense.
The note is convertible (at the option of the holder) into common stock at
the lesser of 80% of the average of the 3-lowest closing bid prices during
the 30 trading days prior to the closing date (April 12, 2001) or 80% of
the average of the 3-lowest closing bid prices during the 30 trading days
prior to the conversion date (assumed to be September 30, 2002). At April
12, 2001, the note was convertible into approximately 2,181,500 common
shares at an exercise price of approximately $0.1021 per share, and at
September 30, 2002, the note was convertible into approximately 20,189,875
common shares at an exercise price of approximately $0.0064 per share. In
either instance, the fair value of the debt instrument (due to the 80%
pricing advantage) was $375,000 (a 25% premium on the principal value),
resulting in a further
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
convertible debt discount of $152,228, representing the difference between
the note's fair value of $375,000 and the allocated proceeds at issuance of
$222,772. This discount was also fully amortized at September 30, 2001.
A corresponding $152,228 credit was made to additional paid-in capital for
the conversion benefit option, i.e., the intrinsic value of the matured
debt instrument. Interest accrued at 8% on the $300,000 note principal
through September 30, 2002 was $17,168; for presentation purposes, this
interest was added to the principal value of the note at the year-end
balance sheet date. The holder can also convert the accrued interest into
common stock at a 25% premium ($4,292), bringing the total conversion
benefit option to $155,027. Total amortization of interest on the
discounted convertible note during the year ended September 30, 2001
(including $32,775 in debt issuance costs associated with the transaction)
amounted to $265,030.
The maturity date on the $300,000 principal value 8% convertible note,
initially October 12, 2001, was extended to December 1, 2001. Because of
the inherent conversion benefit feature, the aggregate note with accrued
interest, totaling $311,194 at September 30, 2001, was classified as a
long-term liability.
The Company was unable to pay-off the note at maturity. However, after
receiving bridge financing from another investment group in February 2002,
the Company subsequently repaid $150,000 of the obligation, as the note
holder elected to not convert the debt to shares. Consequently, the note
holder sold 1,479,264 of the 4,773,208 shares of the Company's common stock
that had been pledged by officers of the Company as collateral, resulting
in net proceeds of $49,148. Adding accrued interest of $17,168 at an
annual rate of 12%, brought the loan balance at September 30, 2002 to
$129,214. Subsequent to September 30, 2002, the note holder sold the
remaining 3,293,944 pledged shares for net proceeds of $67,144 and netted
another $3,200 from the issuance of 500,000 new Company shares, bringing
the total liability down to approximately $60,000.
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 8. NOTES PAYABLE (continued)
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund. This loan from the Mercator Momentum Fund was a short-term loan due
May 15, 2002 and accrues interest at an annual rate of 18%. The loan was
secured by shares of common stock. On June 14, 2002 Mercator Momentum Fund
transferred collateral in the form of 5,861,814 shares of common stock to
their name because the Company was in default on the loan. Thereafter, on
June 21, 2002, Mercator Momentum Fund filed an action against
Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in
the Superior Court of California, County of Los Angeles (Case No.
BC276283) for breach of promissory note, foreclosure of security
interests and fraud and deceit. Mr. Spigno is the Chairman of the Board
and a director of the Company and is also the Company's Chief Executive
Officer. Ms. Spigno is the Company's Secretary and Chief Financial
Officer. On July 3, 2002, Mercator Momentum Fund filed a first amended
complaint in the Superior Court of California, County of Los Angeles (Case
No. BC276283) adding a claim for common count for money lent. Mercator
Momentum Fund seeks damages of approximately $243,000 plus
approximately $66 in interest per day commencing June 21, 2002 and other
compensatory and punitive damages of unspecified amount. The Company
believes that Mercator Momentum Fund's claims are without merit
because, among other factors, they have affirmative defenses to those
claims, including usury and the satisfaction of amounts owed under loan
from Mercator Momentum Fund as a result of the enforcement by Mercator
Momentum Fund of its security interest in shares of common stock. The
Company intends to vigorously defend against these claims and to pursue
appropriate counterclaims against Mercator Momentum Fund.
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 9. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's
continued research and development efforts as of March 29, 2002, the
Company entered into a securities purchase agreement and related agreements
with four accredited investors (the "Purchasers") for the purchase of up to
$750,000 of the Company's 12% Convertible Debentures due one year from
their date of issuance. The Company granted the holders of the debentures a
continuing security interest in all of the Company's assets to secure the
Company's obligations under the debentures and related agreements. The
debentures bear interest at a rate of 12% per annum, payable quarterly in
common stock or cash at the option of the Purchasers.
On March 29, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares
of common stock at a per share exercise price equal to the lesser of $.045
and the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the Company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 750,000 shares of
common stock at a per share exercise price equal to the lesser of $.045 and
the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 9. SECURED CONVERTIBLE DEBENTURES (continued)
On June 17, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares
of common stock at a per share exercise price equal to the lesser of $.045
and the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
The Company's convertible debentures and related warrants contain anti
- -dilution provisions whereby, if the Company issues common stock or
securities convertible into or exercisable for common stock at a price less
than the conversion or exercise prices of the debentures or warrants, the
conversion and exercise prices of the debentures or shall be adjusted as
stipulated in the agreements governing such debentures and warrants.
The fair value of the twelve debt instruments (due to the 100% pricing
advantage) in aggregate was $1,500,000 (a 100% premium on the principal
value) making the beneficial conversion option $649,913 at inception
($750,000 less the $100,087 allocated to the issuance of the 3,750,000
related warrants).
During the fiscal year ended September 30, 2002, the Company issued
12,667,178 shares of common stock in connection with regular interest
payments and upon conversion of an aggregate of $93,130 of principal and
$6,916 of related interest on the Company's convertible debentures. A
corresponding reduction of $80,702 to the beneficial conversion option was
made.
As of September 30, 2002, the Company was indebted for an aggregate of
$676,738 of principal and accrued and unpaid interest on these convertible
debentures. To the extent debentures issued by the Company are converted
into shares of common stock, the Company will not be obligated to repay the
converted amounts.
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 9. SECURED CONVERTIBLE DEBENTURES (continued)
As part of the recording of the convertible debt transactions, a beneficial
conversion option for $649,913 was recognized, along with a corresponding
debt discount. The total debt discount of $750,000, including $100,087
attributable to the stock warrants, is being amortized over the one-year
life of the debt instruments. $279,115 was amortized through September 30,
2002, resulting in an unamortized discount of $401,652 at September 30,
2002, which was net of $69,233 in convertible bond discount that was
transferred to equity upon the conversion of $93,130 principal value of
debt, along with $6,916 in accrued interest. Accordingly, the $80,702 pro
- -rata portion of the beneficial conversion option attributable to the
$93,130 in debt principal converted, was also transferred to common stock,
leaving a balance $724,238 at September 30, 2002. The conversion of the
Purchaser debt and accrued interest during the period resulted in the
issuance of 12,667,178 shares of the Company's common stock.
As noted above, $93,130 of the $750,000 principal value of convertible debt
at September 30, 2002 had been converted, leaving a principal balance of
$656,870 (plus accrued $19,868) at September 30, 2002. $89,730 of the
remaining principal balance has been classified as long-term, based on
expected additional principal conversions of $9,970 per month through June
2003.
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 250,000,000 shares of
common stock, no par value per share, and 50,000,000 shares of preferred
stock, $1.00 par value per share. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock and 1,000,000 shares have been designated as Class B Preferred Stock,
and the remaining 48,000,000 shares are undesignated. As of September 30,
2002, there were 64,311,823 shares of the Company's common stock
outstanding held by approximately 750 holders of record and 200,020 shares
of the Company's Class A Preferred Stock outstanding held by one holder of
record and no shares of Class B Preferred Stock outstanding.
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
Each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti
- -dilution rights or any other preferential rights.
In October 2000 through April 2001, the Company issued 250,000 common
shares to two consultants for investor relations services valued at
$67,500.
In October 2000 and April 2001, the Company issued 229,388 restricted
common shares to a consultant for prior year's services of $19,200 and
current year's services of $22,080.
During the months of October 2000, April 2001, and July 2001, officers of
the Company were issued a total of 3,764,249 restricted common shares for
accrued compensation of $300,291 and current year's compensation of
$160,927.
In November 2000, the Company issued 50,000 restricted common shares valued
at $20,000 to its outside accountant for services rendered.
In December 2000, the Company issued 10,000 shares of common stock to a
consultant for prior year's accrued services of $4,330.
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In January 2001, a consultant exercised 400,000 common stock options at
$0.085 each; the $34,000 in exercise proceeds were applied against an
outstanding note payable due the consultant. In connection with this
transaction, $52,000 of additional paid-in capital (recorded as stock
options exercisable) was reclassified to common stock.
In January 2001, an investor purchased 1,000,000 shares of the Company's
restricted common stock for $75,000.
In January 2001, a note holder converted $75,000 principal value of debt
for 300,000 restricted shares of the Company's common stock.
In March 2001, 45,500 shares of the Company's common stock were issued to
investors in a private placement for $3,787 in cash. The shareholders also
received 45,500 common stock warrants, exercisable through March 3, 2003 at
$2.00 per share.
In April 2001, the Company issued 1,000,000 common stock warrants, along
with $300,000 principal value 8% convertible debt. Of the $300,000 in
proceeds, $77,228 was allocated to the cost of the warrants, which are
exercisable at $0.192 per share over a four-year period. The balance of
the proceeds ($222,772) was allocated to the cost of the debt
instrument.
In April 2001, the Company recognized the conversion benefit option on the
$300,000 principal value 8% convertible debt noted above. The conversion
benefit option was recorded at its intrinsic value of $152,228,
representing the difference between the fair market value of the debt
instrument ($375,000) and the recorded initial cost ($222,772). At the
date of issuance, the conversion benefit option was based on the conversion
of the debt into 2,181,500 common shares.
In April 2001, the Company issued 50,000 restricted shares each (a total of
150,000 shares) as bonuses to a director and two consultants, valued at
$16,982.
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In April 2001, the Company issued 50,000 restricted shares of the Company's
common stock to a consultant for services valued at $5,846.
In April 2001, the Company issued in aggregate 400,000 restricted shares of
the Company's common stock (100,000 shares each) to four members of its
advisory board for consulting services rendered totaling $46,772.
In June 2001 through September 2001, the Company issued 1,177,012 common
shares to a consultant for services totaling $232,683.
In September 2001, the Company issued the above consultant another 779,347
shares of the Company's common stock valued at $$88,300, of which $44,500
pertained to vendor payables advanced by the consultant, with the balance
of $43,800 being a retainer. The consultant was also issued 2,000,000
common stock options, exercisable at $0.13 each over four years and valued
at $115,000.
In September 2001, the Company recognized an additional conversion benefit
option of $2,799, corresponding to a 25% premium on $11,194 in accrued
interest on $300,000 principal value 8% convertible debt.
During the months October 2001 through January 2002, the Company issued a
total of 2,333,334 shares of its restricted common stock for cash of
$145,000 in private placements. In conjunction with these stock issuances,
the Company issued 700,000 common stock warrants at an exercise price of
$1.00 per share, expiring November 2003 through January 2005.
During the period October 2001 through September 2002, the Company issued
5,300,000 shares of its common stock (of which 4,100,000 shares were
restricted) to a consultant in exchange for accrued consulting services of
$203,566. In September 2002, 1,000,000 common stock options were also
issued to the consultant at an exercise price of $0.50 until September
2004. The common stock options were not recorded in the financial
statements, as they had nominal value.
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In October 2001 through November 2001, the Company issued 60,000 shares of
its Class A preferred stock to its CEO for a $60,000 reduction of debt. An
additional 250,000 of Class A preferred stock options were issued to the
CEO at an exercise price per share of $1.00 through November 2005. 9,890
Class A preferred stock options issued in earlier years to the CEO expired
in December 2001.
In December 2001 and January 2002, the Company issued 500,000 shares of its
restricted common stock to a consultant in exchange for media services
rendered in the amount of $87,500.
In December 2001 and January 2002, a consultant exercised 550,000 common
stock options at $0.13 per share in exchange for debt of $71,500. As part
of the transaction, $31,625 in stock options exercisable was transferred to
common stock.
In January 2002, the Company issued 192,100 common stock warrants to
investors at an exercise price of $2.00 per share, expiring in September
2004.
During the months February 2002 through August 2002, the Company issued
1,680,000 shares of its common stock (including 50,000 restricted shares)
in exchange for $85,500 in consulting services.
During the months March 2002 through June 2002, the Company issued
3,750,000 in three-year common stock warrants as part of a $750,000 12%
convertible debt issuance, exercisable at the lower of $0.045 and 50% of
the market price of the common stock (as defined) through the date of
exercise. The warrants were recorded at $100,087 and the debt at $649,913,
based upon the relative fair values of each, and a beneficial conversion
option for an additional $649,913 was also recognized.
In May 2002 and June 2002, the Company issued a total of 500,000 shares of
its restricted common stock for cash of $25,000 (net of $25,000 in fees) in
private placements. In conjunction with these issuances, the Company
issued 500,000 common stock options at an exercise price of $0.50 per
share, expiring April 2004 through June 2004. The common stock options
were not recorded in the financial statements, as they had nominal
value.
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In May 2002, the Company issued 100,000 shares of its restricted common
stock to an engineering consultant in exchange for $5,000 in accrued
services.
In June 2002 through September 2002, the Company issued 12,667,178 of its
common shares to an investor group in exchange for $93,130 in convertible
debt and $6,916 in interest (considered services). In conjunction with
these transactions, $80,702 of the Company's beneficial conversion option
was also transferred to common stock, and $69,233 in convertible note
discounts was applied against common stock as a result of debt conversion.
In June 2002, the Company issued 48,077 shares of its common stock to its
former Acting President for $7,788 in accrued compensation. In June 2002,
the Company issued 3,500,000 shares of its common stock valued at $179,125
in partial settlement of a $300,000 note.
In June 2002, the Company issued 1,000,000 restricted common shares to an
outside accountant in exchange for $30,000 in accrued services rendered.
In September 2002, the Company issued 4,000,000 shares of its restricted
common stock to a consultant/investor for $30,000 in cash and reduction of
debt of $10,000. 1,000,000 common stock options were also issued to the
consultant at an exercise price of $0.50 until September 2004. The common
stock options were not recorded in the financial statements, as they
had nominal value.
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 11. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2002:
Deferred tax asset, benefit
of net operating loss
carryforward $ 7,000,000
Valuation allowance (7,000,000)
-----------
Net deferred taxes $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is
more likely than not that it would not be recovered. During the year ended
September 30, 2002, the deferred tax asset and valuation allowance were
both increased by $1,000,000.
The Company has approximately $17,400,000 in both federal and California
net operating loss carryforwards. The federal net operating loss
carryforwards expire as follows: $2,700,000 in the year 2012, $5,300,000 in
2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,400,000 in 2021 and
$2,300,000 in 2022. The California net operating loss carryforwards expire
as follows: $2,700,000 in the year 2002, $5,300,000 in 2003, $1,200,000 in
2004, $3,500,000 in 2005, $2,400,000 in 2006, and $2,300,000 in 2007. The
latest federal and California corporate income tax returns filed by the
Company were for the tax year ended November 30, 2000.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into four employment agreements with key
individuals, the terms of the agreements are as follows:
1) The CEO (and again President) of the Company entered into an
agreement dated October 2, 1995 (which was subsequently amended September
1, 1997, September 1, 1999, and March 27, 2000) for a period of five years
(to April 1, 2005), and he is entitled to receive a base salary of $160,000
per year. The employee shall further receive a bonus, paid at year-end,
equal to 50% of the employee's salary, for continued employment. The
staying bonus will be compensated for with the Company's restricted common
stock. He is also granted an option to purchase up to 2,000,000 shares of
the Company's
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
restricted common stock at a price equal to 50% of the average market value
for the prior 30 trading days before exercise. On March 27, 2000, the
exercise price was adjusted to a flat $0.3864 per share, with an expiration
date of December 2, 2003.
2) The Acting President of the Company entered into an agreement
dated September 11, 2000 for a period of six months through March 11,
2001. On March 1, 2001 the agreement was extended through
September 30, 2001. He is entitled to receive a base salary
(consulting fees) of $120,000 per year, of which 50% shall be paid in
cash and 50% shall be paid in restricted common stock at a rate equal to
50% of the average market closing price for the last 5 trading days of
each quarter. He shall be issued 100,000 shares of restricted common stock
as a hiring bonus, at a per share price of $0.28415, equivalent to 50% of
the average market closing price for the prior 30 trading days before
the agreement date. He shall further receive performance bonuses (paid
in restricted common stock) upon successful completion of specific
milestones pertaining to the implementation and deployment of the HNET
System. The incentive package could net him up to 650,000 shares of
restricted common stock. As of September 30, 2002, none of these
milestones were met. He is also granted an option through March 11, 2001
to purchase up to 100,000 shares of the Company's restricted common stock
at a price of $0.38 per share. This option has since expired. The
Acting President no longer works for the Company in this capacity, but
remains as a member of the Advisory Board.
3) The Secretary and Treasurer of the Company entered into an
Agreement dated October 2, 1995 (which was subsequently amended September
1, 1997, September 1, 1999, and March 27, 2000), for a period of five years
(extended through April 1, 2005), and she is entitled to receive a base
salary of $80,000 per year. The employee shall further receive a bonus,
paid at year-end, equal to 50% of the employee's
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
salary, for continued employment. The staying bonus shall be compensated
for with the Company's restricted common stock. She is also granted an
option to purchase up to 500,000 shares of the Company's restricted common
stock at a price equal to 60% of the average market value for the prior 180
trading days before exercise. On March 27, 2000, the exercise price was
adjusted to a flat $0.38 per share, with an expiration date of December 31,
2004.
4) The Chief Technical Officer of the Company entered into an
agreement dated August 1, 1998 for an initial term of three years (extended
through August 1, 2003), and he is entitled to receive a base salary of
$150,000 per year, with a minimum of $90,000 to be paid annually in cash
and the balance paid (at the option of the Company) in cash or restricted
common stock under rule 144. The employee shall receive a hire-on bonus of
$75,000 worth of the Company's restricted common stock under rule 144, at
one-half market price. The employee shall further receive performance
bonuses (paid in restricted common stock, as above) upon successful
completion of specific milestones pertaining to the implementation and
deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up
to 500,000 shares of the Company's restricted common stock at a price equal
to 60% of the average market value at the date of purchase. As of
September 30, 2002, none of the aforementioned milestones had been
successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a
party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund in order to make an initial $100,000 payment to Laurus Master Fund,
Ltd. and to fund continuing development of the Company's H-Net(TM) system.
This loan from the Mercator Momentum Fund was a short-term loan due May 15,
2002 and accrues interest at an annual rate of 18%. The loan was secured by
shares of the Company's common stock. As of June 13, 2002, the
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
Company owed Mercator Momentum Fund approximately $243,000 of principal and
accrued and unpaid interest under this loan and were in default in the
repayment of this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in the form
of 5,861,814 shares of the Company's common stock into its name as a result
of the Company's default on Mercator's loan. Of the 5,861,814 shares of
common stock transferred into the name of Mercator Momentum Fund, 3,500,000
shares of the Company's common stock were issued and pledged as collateral
by the Company in February 2002, and 2,361,814 shares of the Company's
common stock were issued and pledged as collateral by Robert Spigno, the
Company's Chief Executive Officer, in February 2002.
On June 21, 2002 Mercator Momentum Fund filed an action against Conectisys
Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court
of California, County of Los Angeles (Case No. BC276283) for breach of
promissory note, foreclosure of security interests and fraud and deceit.
Mr. Spigno is the Chairman of the Board and a director of the Company and
is also the Company's Chief Executive Officer. Ms. Spigno is the Company's
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
Company believes that Mercator Momentum Fund's claims are without merit
because, among other factors, they have affirmative defenses to those
claims, including usury and the satisfaction of amounts owed under loan
from Mercator Momentum Fund as a result of the enforcement by Mercator
Momentum Fund of its security interest in shares of common stock. The
Company intends to vigorously defend against these claims and to pursue
appropriate counterclaims against Mercator Momentum Fund.
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
The Company, during its normal course of business, may be subject from time
to time to disputes and to legal proceedings against it. Both counsel and
management do not expect that the ultimate outcome of any current claims
will have a material adverse effect on the Company's financial statements.
NOTE 13. FORM S-8 FILINGS
In September 2001, the Company filed a registration statement on Form S-8
covering its amended Non-Qualified Stock Option and Stock Bonus Plan for
independent consultants to the Company, which authorizes the issuance of an
additional 3,000,000 shares of common stock. 1,000,000 of these shares
valued at $113,300 were issued to a consultant as a retainer in September
2001. Another 1,500,000 shares valued at $192,566 for accrued services of
$153,566 and reduction of debt of $39,000 were issued to consultants during
the three months ended December 31, 2001. Later during the fiscal year
ended September 30, 2002, 500,000 shares valued at $57,500 were issued to
consultants for services of $25,000 and reduction of debt of $32,500
leaving an unissued balance of zero shares under the Company's amended Non
- -Qualified Stock Option and Stock Bonus Plan.
In August 2002, the Company filed a registration statement on Form S-8
covering a 1,000,000 shares issued to an independent consultant to the
Company, which authorized the re-sale of the 1,000,000 shares of common
stock valued at $20,000.
NOTE 14. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a
note holder options to purchase 500,000 shares of the Company's Class B
preferred stock at an exercise price of $5.00 per share. As consideration,
the Company reduced its debt to the note holder by $50,000 and received an
extension of time to pay-off its promissory note. The Company also issued
to its CEO options to purchase another 500,000 shares of the Company's
Class B preferred stock at an exercise price of $5.00 per share in exchange
for a reduction in debt of $50,000. Total consideration
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
received on the above issued options, as evidenced by debt reduction, was
$100,000. These options can be exercised through November 1, 2002 and can
also be converted into common stock at the rate of 10 common shares for
each Class B preferred share. In September 2001, the exercise price on the
Class B preferred stock options was adjusted to $2.50 per share and the
exercise period extended to November 1, 2004.
The Company's CEO currently owns 200,020 shares of the Company's Class A
preferred stock, of which 60,000 shares were purchased during the year
ended September 30, 2002, and has options to purchase another 250,000
shares for $1.00 per share through November 1, 2005.
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. No common
stock options or warrants were granted to officers and directors of the
Company during the years ended September 30, 2002 or 2001. During the
year ended September 30, 2000, the Company had issued 100,000 common stock
options to its Acting President at an exercise price of $0.38 per share,
exercisable over a six-month period. As the exercise price approximated
the market price of the common stock on the date of grant and the term of
the options was short, no compensation cost had to be recorded in the
financial statements under the Black-Scholes call option pricing model.
These common stock options expired on March 11, 2001.
The total balance of stock options and warrants exercisable at September
30, 2000 was $1,235,005, including $100,000 attributable to the Company's
Class B preferred stock, as noted above.
In January 2001, a consultant exercised 400,000 out of 500,000 common stock
options that had been granted in September 2000, at an exercise price of
$0.085 per share. The $34,000 proceeds were applied to an outstanding note
due the consultant. Additionally, $52,000 of additional paid-in capital
(recorded as stock options exercisable) was reclassified to common stock.
This was because an aggregate fair value amount of $65,000 had been
recognized in the financial statements when these options were granted in
September 2000 at an exercise price set at 15% below market. The fair
value was determined utilizing the Black-Scholes call option
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
pricing model, assuming a 6% risk free rate of return and a volatility
factor of 50%. The remaining 100,000 common stock options expired in
September 2001.
In March 2001, 45,500 common stock warrants were issued to common stock
subscribers, exercisable at $2.00 per share through March 3, 2003. These
warrants had no material value upon issuance.
In April 2001, 1,000,000 common stock warrants were issued to an investor
in conjunction with a $300,000 principal value 8% convertible note. The
warrants are exercisable at $0.192 per share over a four-year period, and
were valued at $77,228 (see Note 8 above).
In September 2001, 2,000,000 common stock options were issued to a
consultant. The options are exercisable at $0.13 per share over a four
- -year period and were valued under the Black-Scholes call option pricing
model (assuming a 50% volatility factor and a 5% risk-free rate of return)
at $115,000, bringing the balance of stock options and warrants exercisable
at the September 30, 2001 fiscal year-end to $1,375,233.
In December 2001 and January 2002, the consultant exercised 550,000 of the
above common stock options, applying the $71,500 cost of exercise against
an outstanding note payable. Stock options exercisable were also reduced
and transferred to common stock in the amount of $31,625.
In March 2002 trough June 2002, 3,750,000 three-year common stock warrants
were issued to an accredited investor group in connection with a $750,000
12% convertible debenture financing arrangement (see Note 8 above). The
allocated cost of these warrants amounted to $100,087, so that the total
stock options and warrants exercisable at September 30, 2002 was now
$1,443,695.
During the year ended September 30, 2002, an additional 6,852,205 common
stock options were granted to consultants and investors, at exercise prices
ranging from $0.50 to $2.00 per share, and over terms expiring from
November 1, 2003 through January 16, 2005. Because these strike prices
were substantially above the market price of the Company's common stock, no
value was attributed to these options at the time of grant.
<page>F-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14. STOCK OPTIONS (continued)
The Company has granted various common stock options and warrants to
employees and consultants. Generally, the options and warrants were
granted at approximately the fair market value of the Company's common
stock at the date of grant and vested immediately, except that when
restricted rule 144 common stock was issued, the options and warrants were
granted at an average market discount of 50% (ranging from between 20% to
75%). Compensation expense for options and warrants issued to employees
for services were recorded as the difference between the intrinsic value of
those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price in accordance with APB
Opinion No. 25, with pro forma disclosure of the excess market value as
required by FASB No. 123. All options and warrants issued to consultants
and other non-employees were recorded at the fair value of the services
rendered and equivalent to the market value (as discounted, if applicable)
of the equity instruments received as per FASB No. 123. The market value
was determined by utilizing an averaging convention of between 5 to 30 days
of the closing price of the Company's common shares as traded on the over
- -the-counter bulletin board (stock symbol CNES) through the grant date and
applying certain mathematical assumptions as required under the Black
- -Scholes model. Such assumptions, pertaining to the risk-free annual rate
of return and stock volatility, were generally the same as those mentioned
above when making fair value disclosures for the issuance of officer and
employee stock options, except that the risk-free annual rate of return
during the latter half of fiscal 2001 and subsequent was assumed to be 5%
(rather than 6%) due to the general decline of interest rates occurring
throughout the economy and the world.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal years ended September
30, 2002 and September 30, 2001 was as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2000 3,207,154 $.69
Granted 3,000,000 .15
Exercised (400,000) .09
Expired (200,000) .23
----------
Balance outstanding, September 30, 2001 5,607,154 .42
Granted 3,750,000 .05
Exercised (550,000) .13
----------
Balance outstanding, September 30, 2002 8,807,154 $.28
========== ====
The following table summarizes information about common stock options at
September 30, 2002:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- ------------- --------- ------- ------- --------- -------
$2.00 - $2.00 563,500 23 $ 2.00 563,500 $ 2.00
$ .38 - $ .38 100,000 27 $ .38 100,000 $ .38
$ .19 - $ .19 1,000,000 30 $ .19 1,000,000 $ .19
$ .05 - $ .05 3,750,000 31 $ .05 3,750,000 $ .05
$ .13 - $ .13 1,450,000 35 $ .13 1,450,000 $ .13
$ .39 - $ .39 1,443,654 38 $ .39 1,443,654 $ .39
$ .38 - $ .38 500,000 38 $ .38 500,000 $ .38
$ .05 - $2.00 8,807,154 33 $ .28 8,807,154 $ .28
============= ========= == ======= ========= =======
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
The above tables exclude 4,852,205 warrants exercisable at prices ranging
from $0.50 to $2.00 per share, which have nominal value and which were
issued to certain stock subscription investors and consultants. These
warrants will all expire during the period November 1, 2003 through January
16, 2005. The tables also exclude a contingent issuance to the Company's
Chief Technical Officer of 2,000,000 common stock options exercisable at
$0.50 per share and expiring December 31, 2004. These common stock options
will not vest until certain milestones have been attained.
NOTE 15. SUBSEQUENT EVENTS
(a) In October 2002, the Company filed a registration statement on Form
S-8 covering a 1,000,000 shares issued to an independent consultant
to the Company, which authorized the re-sale of the 1,000,000
shares of common stock valued at $20,000.
(b) In November 2002, the Company received funding of another $200,000
(net proceeds of $143,600) from an investor group in exchange for
one-year 12% convertible debt and 1,000,000 common stock
warrants, exercisable at $0.005 per share over a three-year
period. During the quarter ended December 31, 2002, this same
investor group also converted approximately $33,000 of debt and
accrued interest into 7,532,953 shares of the Company's common
stock.
(c) Through January 6, 2003, in addition to the common share issuances
described in Notes 15(a) and 15(b) above, the Company has issued
restricted common stock in the aggregate of 24,265,490 shares,
valued at approximately $371,000. Of the aggregate amount,
7,630,468 shares were issued on account of accrued
consulting fees totaling approximately $76,000, 7,135,022
shares were issued to officers for debt reductions of
approximately $237,000, 750,000 shares were issued to an
employee and a consultant for bonuses of approximately $7,000,
500,000 shares were issued to a note holder for a debt reduction
of approximately $3,000, 1,250,000 shares were issued to
members of the Advisory Board for services of approximately
$13,000, and 7,000,000 shares were issued to an individual for
$35,000 in cash.
<page>F-52